June 2014 Newsletter to Clients

Summer doldrums will be upon us soon so expect to see the steady rise in the stock market to slow. The old adage, sell after Memorial Day and buy after Labor Day, stems from the idea that all the wealthy, Wall Street power players ship off from lower Manhattan to the Long Island Hamptons for the summer. Obviously, this idea is silly, but summer is the time for most folks to vacation and the result is less activity in the stock market.

Many of you have read the doomsday predictions based on less than robust economic activity and the fear that the Federal Reserve will reverse its course of promoting economic growth via low interest rates and monthly U.S. Government bond buying. The bearish predictions suggest company earnings growth do not support the rise in stock prices. These bears, as they are called because bears attack downwardly, also suggest higher interest rates will cool economic growth and result in the compression of price to earnings ratios. Therefore, the stock market weakens.

The problem with these bearish predictions is the lack of historical perspective. In the year 2000, the nearly 20-year stock market rise stopped suddenly. The NASDAQ 100 collapsed from about 5,000 to less than one half its previous level. Obviously, we know in hindsight the NASDAQ was widely overpriced as was the stock market as a whole. The total stock market capitalization, that is the value of all publicly trades shares, reached an astronomical level well in excess of 100% of the country’s gross domestic value, a valuation never before reached.

The former Federal Reserve Chairman labeled the phenomenon ‘Irrational Exuberance’ and he was so right. The stock market collapse was predictable and some of us recognized it and avoided loss. Now to the present… nearly fourteen years later the stock market averages are reaching new highs. Think of all the money accumulating over that period and sitting on the sidelines waiting for a change in the investing climate.

The economic recovery is real and will continue without the kind of interruption we experienced in 2008-2009. The excesses are or have been wrung out of the credit markets. Default rates in the senior secured loan market (think BlackRock Floating Rate Income Trust, BGT) have declined from 1.21% to 1.14%, although some experts expect a default rate of about 2% for the next twelve months. BGT’s default rate has consistently been below average.

Thanks for your continuing confidence and happy vacationing this summer.

Past performance is no guarantee of future results. The opinions expressed are those of Moneywatch Advisors, Inc. and are no guarantee of the future performance of any particular fund. This information is for educational purposes only and is not intended as investment advice. Please consult your financial advisor for more detailed information or for advice regarding your individual situation.