July Stock Market Update

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Brexit was the big news for June as the UK surprised the world and voted to leave the European Union (EU). I won’t cover the details here as Brexit has been covered ad nauseam in the news. In the end the big concerns for investors are the rising dollar, the possibility of referendums in other countries to also leave the EU and the resulting havoc that would extend to the global currency markets.

Once the shock of Brexit wore off, investors quickly realized that the UK leaving the EU meant that there would be no further rate increases by the FOMC in the near term. The added possibility of further Central Bank easing and the fact that the UK accounts for less than 3% of revenues for S&P 500 caused the VIX (volatility index) to completely dry up, forecasting the resulting rapid recovery in stock prices. In the short-term, market participants are once again happy.

There is a strong divergence that is occurring in the market. Companies with strong cash balances to fuel corporate stock buybacks and defensive sectors with solid yields (such as utilities which have led the market with a 25.68% gain over the last year) continue to prop up the overall market.

As long as the focus continues to be on low rates and central bank intervention, retail investors will overlook valuations that are historically high using GAAP earnings, 5 consecutive quarters of declining sales and the 14% decline in profit margins since hitting a post-recession peak in 2014.

The saving grace for the stock market continues to be historically low interest rates causing investors all over the globe to reach for yield and record corporate stock buybacks.

That set aside, my stock market indicators are still flashing red which is a rather bothersome sign. The historically low bond yields which are typically a leading indicator in the medium to long-term, seem to confirm my fears. Therefore I will continue to remain patient, ignore the noise, resist the desperate chase for yield and continue to protect profits while waiting for select long-term investment opportunities. It’s not exciting, but it is profitable long-term.

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