Stocks were down 0.1% in August after hitting all-time highs of 2193 for S&P 500 then closing at 2170, l up 6.2 % year to date. 

Ten year U.S. treasury yields rose from 1.33% July levels, to 1.57% on August 31. The Fed continues to talk about raising the Fed funds rate by year end. The biggest monthly sector loser was Utilities Select SPDR or (XLU), which dropped 5.5%.  

Despite constant chatter from talking heads, we expect no action on rates until we are past the November elections.

GDP seems to be picking up in the second half and corporate profits, while still anemic, are moving in a positive direction.

September is typically a down month for the stock market. BREXIT losses have been erased as dire predictions have not come to pass.

The EU continues to demand more taxes from successful companies like Apple even as the Irish tax authority says the company does not owe $14 billion claimed due by the bureaucrats in Brussels.

 The U.K. vote has brought all these issues to the forefront for discussion. 

We are concerned that investor sentiment has turned too bullish of late. Equity mutual funds continue to shed assets in favor of index ETFs and bond funds.

We have seen a mild selloff in precious metal prices and more in metal stocks after a big rally. The US dollar has risen over the past 2 months.

On the positive side, we see no recession in sight. We see a flatter but not inverted yield curve. We expect only a slow rise in inflation and rates, between now and year end. Valuations for stocks while high are supported by low bond yields and easy earnings comparisons moving forward.

Both the ECB and Bank of Japan continue to print money and buy more financial assets to prop up weak economies.

Emerging markets have rallied off winter lows. Collectively they have lower P/E ratios and higher growth rates than developed markets. European and US bank stocks have rallied off lows.

Prior to the November election, we expect lots of negative ads and some surprises that may roil markets.

Stocks appear to offer better long term prospects than bonds which have become expensive.

If we experience a market drop this Fall, we expect it to be fleeting.

Goldilocks continues to romp free from interference by the 3 bears.

Doug Coppola

John Coppola

September 1, 2016

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