Sluggish Summer Continues

A combination of factors has led to a sluggish stock market so far this summer. Concerns about Greece gave way to concerns about volatility in the Chinese stock market. And while all of this was going on, the price of oil began to plummet again, getting close to the lows it reached earlier this year. As if that weren’t enough, speculation continues to mount about Fed policy and whether the Fed will consider raising interest rates in September 2015.

These factors have all created a heightened sense of uncertainty. “Uncertainty” doesn’t sound like such an awful thing in many contexts, but for markets, uncertainty is a four letter word that can often lead to another four letter word: Markets going D-O-W-N.

The good news is that we believe that all of this short-term uncertainty is just that. Sure, it would be nice if we could stop getting negative headlines out of Greece or if confidence and stability could be restored to the Chinese stock market. And it would be really nice if the price of oil could find that sweet spot — a level where energy companies can be profitable yet consumers won’t be gouged. And while this might be wishful thinking in the near term, there are plenty of reasons not to panic longer term. Among them:

1. Most U.S. investors have little direct exposure to Greek companies or stocks traded on the Chinese exchange. Thus, these issues are more likely short-term “crises of confidence” than long-term headwinds.

2. If the price of oil can avoid dipping below it’s earlier lows, it seems likely that the price of oil will stabilize. There’s also a strong likelihood that mergers and acquisitions in the energy sector could help establish a floor on the sector.

3. LPL Research reports that 72% of companies have beaten their earnings estimates as of July 31st. In addition, ex-energy earnings growth has been between 8-9%.

4. Central banks around the world continue to be very accommodative, which has been a plus for global markets so far. To the extent that markets have become somewhat dependent on “easy” central bank policy, it’s unlikely that policy will make a dramatic shift in the near term even if the Fed raises rates in September.

5. Some of the volatility in the Dow (which is down approximately 4.5% from its all-time highs as of this writing) can be attributed to a few select stocks in that index and their (negative) weighted impact on the Dow.

We would invite anyone with specific questions to give us a call at 800-281-3980. Please remember, nothing in this note should be construed as financial or trading advice. Thanks for reading.

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