Market Update

While the long awaited correction that was expected this summer by many analysts has not yet materialized, the markets seem to have at least started consolidating, and the volatility has increased.  For the last couple of weeks, the major driving force behind market fluctuations was Fed watch — namely, how soon will Fed start easing off of its stimulus program.  Never mind that such easing will happen only if the economy keeps improving, a good thing, normally, but judging by the market drop today, good actually means bad nowadays.  As always, I would suggest turning off CNBC dramas and instead looking at the real news for the companies that you own.

As has been the case this year, the actual news tend to be fairly positive.  The Fed will indeed start wrapping up its stimulus program, the only question is when — late this year or sometime next year.  As a result, the interest rates will rise gradually, bond prices will decline which will drive more investors from bonds into stocks.  Despite mild uptick in interest rates lately, the dollar actually lost ground to major currencies, even the euro, which is good news for U.S. exporting companies that report results in dollars.   Stocks are reasonably valued at 15 times trailing earnings, a midpoint of valuation range, but very attractive given low interest rate environment.  Earnings estimates going forward for the next two quarters are strong compared to last year, at 7.8% and 13% respectively.  Finally, as housing recovery gains steam, more and more people find themselves regaining positive equity — 1.7 million last month.

While the short term volatility may continue, and could even turn into a market correction, I think the long term positive trends for equity investors remain in place.