Perhaps unexpectedly for the steamy days of summer, we find the major domestic equity indices bouncing around record levels. But where will the markets go in the second half of 2014? Will equities continue on their steady, bouncy climb, or will they experience that long-anticipated, yet normal 10% correction?
As we approach the astronomical middle of summer, the direction of the financial markets will be largely guided by two major forces: economic and political. The US economy appears to be gaining momentum following the brief hiccup of the first quarter. Internationally, Europe is emerging from recession, China appears to have achieved a soft landing, and there’s a pulse in Japan. US job growth, albeit slow, has increased consumer confidence -- which in turn led, through intermediate steps, to solid corporate earnings. Corporations are now opening their pocketbooks (read obscene piles of cash) for capital expenditures and acquisitions. Inflation expectations remain extremely low. And although the US Fed is putting the brakes on its asset purchases, world central banks are increasing support.
So far this year, international markets have absorbed numerous geo-political events and trudged right along -- Iraq, Ukraine and Israel most recently. With each headline, markets have initially retreated followed by a bargain-fueled bounce in the next couple of trading sessions. It’s been a bumpy ride, but bumpy is the new normal. I look for economics to prevail.