The June Federal Reserve meeting brought a bit of a surprise last week as chairman Ben Bernanke hinted the Federal Reserve may begin to taper its asset purchases sooner than the market had forecast. Thus far, the S&P has dropped 6% from its May highs. While Bernanke’s move was unexpected, we feel his bark will be worse than the bite. Though Bernanke may like to undertake the rumored action, we feel his hands are tied so to speak, and that the negative market reaction seen the last few weeks just cinches the knot even further. With the S&P trading at 1575 at the time of this writing, we are taking a patient approach and letting this market weakness play out.
While we do expect further selling, we see strong support in the S&P around these levels. As such, we do not believe the end of the bull market is at hand and are, in fact, looking for new highs- potentially as soon as this winter. Why such an outlook? Here are a few reasons:
- The corporate credit markets remain strong. Deals continue to get done at attractive rates
- Thousands of companies have refinanced their debt in the last few years freeing up cash for re-investment and replacing costly long-term debt with more attractive rates
- From a technical perspective, we cannot find any longer-term negative divergences. Nothing on the weekly or monthly charts reveal a cause for deeper concern
- As recently as last month, the so-called “leading indexes” of banks, transports, and semiconductors were making new highs. It’s very unlikely that a new bear market could unfold with none of these three important sectors showing advanced & prolonged weakness
- Treasuries have seen a massive sell-off. We believe part II of this move will be a reallocation into equities
Given all this, we have chosen not to drastically reduce equity allocations, although some small “trading”reductions were and may yet be taken. Of course, we continue monitor both your portfolios and the markets and will take any further action if and when we see fit.
In the meantime, continue to enjoy the summer!