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What to make of the up and down up and down...


The S&P 500 seems to have stalled out, with the market just trading up and down in a range since February. The markets haven’t seemed to recognize the many strong quarterly reports from company’s far and wide showing rising revenues and profits.

But concerns that this might be as good as it gets are weighing on investors. This isn’t a reason to give up, but rather to focus on the specific parts of the market that are continuing to push onward and upward.

Overall, there is more in the general market to like than there is to fear.

First, the price-to-book basis, most stocks in the S&P 500 are still well below the averages seen in the 1990s and 2000s.

This points to one question, is the economy expanding, or is it going to run out of steam? If it’s going to continue to grow, this will mean more companies will see sales increase, which means companies, will invest to expand. Both should result in higher overall stock values and not just higher stock market valuations. That makes for a big difference because if stocks are becoming more valuable, then the stock market isn’t overvaluing the underlying stocks.

Economic growth is still advancing. In the US, the economy has expanded at 2.9% year over year. And the US isn’t alone. The euro currency zone is experiencing growth on track to expand 2.5% on an annualized basis. Britain, despite the challenges of Brexit, should turn in a growth number of 1.5%.

Japan is expected to gain 2.0%. Growth will be even stronger on the emerging markets front, with China expanding at 6.8%.

All of this expansion comes with business investment, business expenditures and consumer spending. This broader global growth supports higher company values, which should result in higher stock prices.

Broad inflation in the US has been moderate, with the Personal Consumption Expenditure Ind

ex (PCE) remaining below the 2.0% rate targeted by the Federal Reserve Bank. And even if it does move above, the Fed continues to voice that PCE over 2.0% is healthy for an expanding economy. So, at the moment, it seems the Fed sees no reason for punitive interest rate hikes, but rather they plan to continue the gradual rise in the fed funds rate to more normal levels. We expect the investment markets to continue to be choppy through the summer and early fall. However, we expect markets to be higher by year end.

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