Despite all geopolitical problems around the world, the recent dip in stocks ended up being minor – just 3.9% from peak to trough. Equities recovered strongly in August, with the S&P 500 up 3.95% in the month (a total return of 9.9% YTD), reaching new all-time highs and crossing above the psychologically-important 2000 level.
Less-convinced advisors who sold the dip got whipsawed by the rebound.
Why are stocks doing so well? We at Model Capital are convinced that fundamentals drive markets, not geopolitics. Based on fundamental factors, our tactical management model expected strength in U.S. equities at the end of July, which gave us confidence to keep our portfolios fully invested. In fact, the model’s outlook became even stronger after the selloff, due to:
- The recovery in employment should boost consumption in the near term.
- Q2-2014 S&P 500 earnings grew 7.7%, which mitigates the negative effect of above-average valuation.
- The Fed officials signaled that the abundance of liquidity is to continue beyond the time when it starts raising short-term policy rates (expected mid-2015). In the meantime, the ECB just dropped its policy rates and announced a bond-buying program to help Eurozone economies.
- WTI crude oil price eased to $95 per barrel from the peak of $106.8 it reached in June. North American supply is rising, as the U.S. became the largest oil producer in the world this year (which itself boost jobs and the economy). Elevated oil price, taken in isolation, is still negative for economic activity and equities, but a continued price decline should reduce this negative effect over time.
About Model Capital Management LLC: we are an investment management firm focusing exclusively on tactical management. Please review the following pages for more information on Model Capital’s approach to tactical management and our tactical asset allocation models/strategies.