Looking Forward To Autumn
Sachem Rock’s near term outlook for the domestic equity market is favorable for investors, despite the last three weeks of sideways motion for the major indexes. We believe that the current malaise is simply a manifestation of the old stock market adage, “Sell In May and Go Away”. The market is likely in a consolidation phase from the gains early in the year, and the recent increase in the indexes in early July.
Over the summer, we have seen the totality of economic data as moderately positive and the low level of growth rates for the United States economy to continue throughout the fall. Any volatility due to “Fed Tapering” is likely to be transitory, a few days, or week at most. Oil prices, higher taxes, and continuation of the low rate of growth in personal income will continue their dampening effect on consumer spending and continue to weigh on domestic GDP growth.
We believe that the fear of a sharp and deep correction expressed by some regarding the Federal Reserve’s tapering of their bond-buying program has a reasonably low probability. Chairman Bernanke’s application of traditional and nontraditional monetary strategies has been near flawless since the advent of the 2008 Financial Crisis, and we have little concern that he would jeopardize the fragile recovery of the US economy by tapering too quickly. The Federal Reserve Chairman will continue to allow his money stimulus strategies to be driven by ongoing data.
We expect a slowly strengthening European market, barring some unforeseen regulatory misstep by the EU’s economic bureaucrats. China growth seems to be stabilizing around 7.5%; and as Sachem Rock expects, China’s growth will accelerate over time as their primary export markets, the US and Europe, return to higher rates of growth.
Sachem Rock also sees a market overreaction related to the rise of the Ten Year Bond Yield to a current yield of 2.71%. We feel at this level, the concern about the housing markets and interest rates is totally overblown. Sachem Rock does see the current thirty-year fixed rate mortgage yield of about 4.6% as causing significant or lasting damage to the housing recovery. To the contrary, Sachem Rock believes the recent sustained sell-off in housing sector equity issues has produced some very attractive opportunities in the sector for investors.
Bond investors should beware going forward, however, because we see the top of the fixed income market (prices) as “in”.
On another note, Sachem Rock recommends extreme caution, especially for retired income investors, regarding investments in domestic defensive stocks with high dividend yields, as many are significantly overvalued relative to their long term sustained rates of growth in net income per share and dividends.