Stocks Hit New High — What’s Next?

Stocks Hit New High — What’s Next?

Stocks have spent most of this year slowly climbing out of a hole created when they fell sharply in February and March. For technically oriented firms like ours, it is troubling when we see the major stock indexes struggling to retrace these market drops, as it suggests the overall trend might be changing (to a downtrend).

So, we were pleased to see, in late August, the S&P 500 index finally break through its January peak. Hopefully that sets the stage for continued growth as we get closer to the final lap of the year. For us, a move to new highs is encouraging because it could portend further gains ahead. Stock markets often exhibit momentum, as rising stock prices often draw in more investors which leads to more gains.

While it took seven months for the S&P 500 index to rebound and break above the high it set in January, the Nasdaq and Russell 2000 indexes reached new highs in late spring. Some indexes remain below their January peaks, including the Dow Jones Industrial Average and most international indices. It is healthy to see multiple markets moving higher together, as it suggests strong breadth (majority of stocks moving up). Currently, on a global scale, the United States shows the greatest market strength. Ultimately, we would like to see foreign markets play catch-up, but for now, we celebrate fortress America.

Does this recent action in the market mean that the happy days will continue to roll on? Not necessarily. There are a number of reasons that the stock market could face a difficult time in the period immediately ahead of us:

  • September is historically the weakest month of the year for stocks, and with stocks up 7% in the past two months, it’s reasonable to expect a pause.
  • Trade tariffs continue to have an impact on businesses here and abroad. This will put a damper on investor enthusiasm unless there is a meaningful resolution with China.
  • The Federal Reserve is marching on with its policy of raising short-term interest rates. At some point, rising rates will begin to have a negative impact on stock prices.
  • Finally, the mid-term elections are looming and the outcome could affect investors. Will the Democrats regain the House (which has been the pattern historically) and might they also regain the Senate? If they do, how will the markets react?

At this point, the FSA portfolios are close to fully invested. The average money market position across all of our strategies is only 7%. As long as stocks can continue to move above the highs reached in January, we will be looking to increase the equity allocation for each strategy up to its limit.

Overall, the economic fundamentals are quite strong, as we’ve reported in these Market Updates this year. The issue for investors is to decipher if stock prices have run ahead of the good fundamental story. So, we could be in for a period of choppiness until there is some resolution of the issues listed above. As always, our objective will be to stay with the market leaders and try to avoid any serious potholes.

Ronald Rough, CFA
Director of Portfolio Management

 

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