The markets and the Olympics shared some commonalities this month. Records are being broken on a daily basis, very few spectators are attending the actual events and it does not have quite the same buzz as past Olympics. Same can be said for the financial markets as record cash sits on the sidelines waiting for the next 2008. For the first time since 1999, all three major U.S. stocks market indices closed in record breaking territory on the same day. This is quite a turnaround from the start of the year when global markets tumbled. The questions are: how did we get here and what keeps the markets moving higher?

Global central banks explain some of the market strength as they continue to support risky assets with easy monetary policies. Investors are skeptical that the U.S. Federal Reserve will raise interest rates soon, while central banks in Europe and Japan have loosened monetary policy this year. This has left global stocks higher and bond yields at all-time lows. Stable oil prices and currency valuations are also giving stocks support. Oil prices rebounded to the mid-$40’s per barrel on expectations that the Saudis will push for limited production at the next OPEC meeting. The 2015 strengthening in the U.S. dollar has been replaced with relative calm. The stable dollar is helping U.S. corporate earnings as 70 percent of companies have reported quarterly earnings above the mean estimate, according to FactSet.

The economic numbers in August were generally good, and even weak economic news has been interpreted as good news for the market. Weak retail numbers showed sales growth was flat in July, and strengthened investors’ belief that the Fed is unlikely to raise rates when it meets next month. Good news has been treated as good news too. Inflation as measured by the CPI remains well below the Fed’s 2 percent target. The 0.5 percent gain in manufacturing output in July may be an indication last’s year’s dollar surge is behind us. Consumer confidence remains high in August with a reading in the low 90’s. The July employment report showed a second consecutive month of strong job growth.

All things considered, the markets seem to be in their happy place. The combination of slow growth, low interest rates, accommodative central banks, recovering energy prices and stable currency has been a recipe for appreciation. For the month all major stock indices posted small gains, both here and abroad. The leading sectors were financials, energy and technology.

The yield on the 10-year U.S. Treasury Note traded in a very tight range, starting the month at a 1.49 percent yield and ending the month at a 1.57 percent. The Fed’s play book appears to be a repeat of last year as they likely implement one 25 basis point rate hike prior to year-end. The only real question is timing. Will it be a pre-election September or a post-election December move?

If you want to be an Olympian investor and go for the gold, you need to bring a similar level of discipline and commitment to your investment program. The spectator sees the champion athlete on the podium receiving their medal, but does not appreciate the hard work and sacrifice expended in achieving the reward. Success takes a lot of hard work and a little bit of luck. The journey to reach your financial goals takes time, patience, hard work and a positive attitude. Like the devoted athlete, keep striving to make your financial plan the best it can be.

MARKETS BY THE NUMBERS:

To expand on these Market Commentaries or to discuss any of our investment portfolios, please do not hesitate to reach out to us at 775-674-2222

Household debt (mortgages, auto loans, credit card debt, etc.) is near its 2008 peak. That’s a headline sure to make many people pause.

Digging into the numbers, one can find that growth in jobs, household income and declining interest rates means that consumers are now in a far more robust situation to pay down that debt. Add in lower cost of energy (both for heating/cooling and weekly gas purchases), and you have even more disposable income. Therefore delinquencies as a portion of total loans are low and stable, which should give investors a sense of relief.

Some will acknowledge that sub-prime lending (loans to those with less than a 600 credit score) for home mortgages has been dialed down post the recession. But they will argue that sub-prime lending for auto purchases are dialed up. Here also, the positive news on higher incomes and lower interest rates apply. While the absolute level of auto loans is higher than the peak in 2006, the portion of disposable income that they represent is well below that of 2006.

Meanwhile home prices, which expanded to bubble proportions in ’08, are rising at a more modest rate in recent months. Sales (and new mortgages) are being restrained by a lack of inventory, both for new homes and existing homes, which is neutral to our economic growth.

As consumer spending accounts for about 70% of total gross domestic product (GDP), the consumers’ heightened ability to pay down debt is a tailwind for our total economic growth.

What about borrowings in the US overall? The debt to GDP ratio remains high if you look at the last 60 years (see chart below). However, the highest levels were due to increased government debt in the wake of the recession, and they have been coming down in each of the last five years. We view current conditions to be healthy for further declines in the rate and positive for U.S. economic growth.

To expand on these Market Reflections or to discuss any of our investment portfolios, please do not hesitate to reach out to us at 775-674-2222