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Many Are Surprised at the Unrelenting Equity Advance.

Many are surprised at the unrelenting equity advance.  Three weeks ago all were pontificating the much needed “correction” was at hand.   After a 4% decline, some declared a correction had occurred and the rally can now continue.  I remarked if this was indeed “a correction,” this was the shortest and most painless correction I have yet experienced.

I ask are we in the proverbial “Teflon market?”

Some have used the adage of “don’t fight the Fed” to rationalize a bullish position. However is not the Fed less stimulative?

Personally I think the Fed is behind the proverbial inflationary curve and a change in interest rates should come shortly, but this is not the prevailing market view.

All are expecting rate increases to occur but the question at hand is at what rate?  Most believe any rate increases will be gradual.  However I ask a different question.  Three months ago the first rate increase was not expected to occur until early 2016.  Some are now suggesting the first increase could be as early as 1Q15.  Is this not a negative as interest rates are the largest determinate of most valuation models?

And then there are the geopolitical issues which are scary at best.  Yes last week the averages did decline for about 3 hours on geopolitical issues but generally speaking the first invasion of a European sovereign country in 70 years, regional anarchy and a general power vacuum has all but been ignored.

Equities are entering into their seasonally weak period.  Historically September produces the worst returns as it is finally accepted early year optimistic revenue and earning projections will not materialize.

This seasonal weakness should be amplified by the midterm elections.  Traditionally markets decline 5% to 22% before the midterms as uncertainty typically increases.

In my view the underlying dynamics of the markets are just too strong, more specifically the gargantuan levels of cash that is searching for a more efficient use.

Today however the trend is your friend until this trend is no more, a trend fueled by massive level of cash searching for a more efficient use, valuations that are only “full,” comfortable economic indicators and perhaps possible electoral change in November that might produce a less dysfunctional Congressional and Administrative branch.

What will happen today? Durable goods and some housing statistics are released.

Last night the foreign markets were mixed.  London was up 0.43%, Paris up 0.67% and Frankfurt up 0.21%.  Japan was down 0.59% and Hang Sang down 0.37%.

The Dow should open nominally higher.   The 10-year is up 2/32 to yiled 2.37%.


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Ken Engelke

Chief Economic Strategist Managing Director

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.