In August, the S&P 500 topped 2,000, the NASDAQ hit a 14-year high, the Dow Jones Industrial Average crossed 17,000 and interest rates remain low so the question everyone is asking: Where do we go from here?

The three to seven year answer is likely higher stock prices and marginally higher short term interest rates. What happens in the financial markets over the next month or the remainder of the year is a more difficult question to answer. The elusive stock market correction has yet to surface and the prediction of higher interest rates still remains a prediction. The financial markets have an uncanny ability to inflict the most pain on the largest number of investors. While the vast majority of investors are positioned for a stock market correction and/or higher interest rates, it should not be a surprise that stocks are moving defiantly higher and interest rates are grinding lower.

August was another solid total return month across many asset classes despite heightened concerns over geopolitical fires that continue to burn. Second quarter corporate earnings were strong and the economy snapped back proving the first quarter results were hindered by an exceptionally harsh winter. The consumer, the main driver of our economy, is more confident than ever and continues to spend at a steady rate. This trend, if maintained, bodes well for future stock prices.

The U.S. stock market set the pace in August. The NASDAQ Composite gained 4.99 percent, the S&P 500 added 4.00 percent and the Dow Jones Industrial Average was up 3.60 percent for the month. International stocks took a back seat to the U.S. this month. Emerging Markets led the international segment gaining 2.25 percent while the MSCI EAFE Index posted a small decline of 0.15 percent.

The fixed income market was running on both cylinders: lower interest rates and tighter credit spreads. Each of these factors equate to higher bond prices, thus bond investors enjoyed some modest capital appreciation to enhance the earned interest income. For the month, the Barclays Aggregate Bond Index was up 1.10 percent. Long term US Treasuries lead the way with an equity-like 4.06 percent monthly return. High yield, investment grade corporate bonds and municipal bonds all had monthly returns greater than one percent.

The bond market has found its happy place. Economic growth is not too hot and not too cold. Inflation is well under control and energy costs are on the decline. The Federal Reserve has telegraphed their intentions of ending the bond purchase program in 2014 and will very gradually begin moving the Fed Funds Rate higher sometime in 2015. U.S bond investors often overlook the global yield landscape. The chart below show 10-year government bond yields from some other developed countries and one can easily argue the 10-year U.S. Treasury at a 2.39 percent yield is a great relative value at these yields. Don’t be surprised if we see a 2.00 percent U.S. 10-year yield before we see a 3.00 percent yield.

We do not see current market bubbles in either the bond or stock markets. In the stock market, we remain cautious at these valuations but are still constructive over the long term. While a five to ten percent price correction is overdue, we would view it as a buying opportunity if it comes. Bond performance has been a positive surprise this year and when viewed in the global light, the U.S. bond market still looks attractive. At the end of the day bonds will be bonds. Set your return expectations accordingly. Earning the coupon with general price stability will be the likely path into 2015.

Our recommended approach for investors is to take a long term view, set your financial course and stay the course. Review Mike Binger’s August 25th Market Reflection piece posted on the Gradient Investment website. He discusses the pros and cons of long-term investing versus market timing. Market timing is difficult proposition in normal market cycles and can be exasperating when the market consistently defies consensus thinking. The cure to this emotional struggle is to become a long term investor armed with a long term financial plan. Add focus, patience, put time on your side and you are well on your way to achieving your financial goals.

July has been a month of ups and downs. One day up and the next day down, one week up and the next week down. It appears each day’s breaking news dictated the market direction. The headlines streamed throughout the month: passenger plane shot down over the Ukraine, Israeli forces enter Gaza, oil prices dip below $100 per barrel, consumer confidence surges to 90.9, second quarter corporate earnings growing at an 8-10 percent annual rate, Argentina defaults on their debt, and the first release of second quarter GDP shows the U.S. economy expanding at 4.0 percent.

July gave us Dow 17,000 and an S&P 500 ever so close to 2,000. With the stock market touching record high territory and the 2008 financial crisis still burned into the investor’s psyche; it’s no surprise investors are a bit jittery. A fatal last day of July caused the S&P 500 to lose -1.38 percent for the month, the NASDAQ retreated -0.82 percent and emerging markets lead the way with a positive 1.93 percent return. While the overall market has not experienced a meaningful correction recently, we are encouraged by the rotation of leadership within the stock market from momentum growth companies to dividend and value names.

The Federal Reserve seems to be pressing all the right buttons and saying the all the market friendly things; but raising interest rates some time in 2015 is now part of the dialogue. Interest rates were stable in July, but wider high yield credit spreads brought some sanity back to this overvalued sector of the bond market. Performance among the various bond sectors was mixed in July. The monthly winners were: long-term U.S. Treasuries (+0.55 percent), municipal bonds (+0.18 percent), and US Treasury TIPS (+0.03 percent). The monthly losers were: high yield bond (-1.33 percent), mortgage-backed securities (-0.59 percent), intermediate U.S. Treasuries (-0.26 percent) and investment corporate bonds (-0.06 percent). Overall, the Barclays Aggregate Bond Market Index was down 25 basis points for the month.

At the beginning of the year, our 2014 forecast was for stocks to return high single digits and bonds to deliver results in the three to four percent range. The calendar year forecasts have been achieved in the first seven months, so what lays ahead for investors the remainder of the year? We are still confident in the forecast and feel the market may be running five months ahead of itself. This is not a reason to panic, rather a chance to dial back return expectations, stay the course and give valuations a chance to catch up. The second quarter rebound in GDP and earnings growth are just what the market needs to justify today’s valuations and set itself up for a prosperous 2015.

As a money manager, we have the privilege to speak with many independent advisors and their clients. Our sense is the mood among investors is one of caution, respect, surprise and angst. Investor anxiety is a healthy sign and we feel bodes well for the markets heading into 2015. Bull market tops are formed when everyone is rushing to buy indiscriminately. This is not the case in today’s market. Investors are cautious and waiting for the illusive ten percent correction before allocating cash or bonds to the stock market. Investing is a marathon, not a sprint. Prudence, patience and long-term participation are the best ways to achieve your financial goals.

The term “Goldilocks Economy” was coined by Dr. David Shulman in the early 1990’s. It describes an economy with sustainable moderate growth, low inflation, a market friendly monetary policy, low interest rates and increasing asset prices. This term has recently resurfaced in the media as it accurately describes our current economic situation. This complacent state will not last indefinitely, but let’s take a moment to enjoy it.

The economy’s best friend the past six years has been an accommodative central bank. The Federal Reserve implemented a zero interest rate policy over five years ago and Janet Yellen’s recent comments suggest there is no predetermined end in sight. The Fed Fund Rate remains targeted between zero and twenty-five basis points for the foreseeable future. The Federal Reserve’s three plus trillion dollar bond buying spree aimed at stabilizing the banks and adding liquidity is coming to an orderly conclusion as they complete their tapering program. The current dovish Fed will likely remain market friendly through 2014 despite recent the inflation and employment numbers.

Inflation ticked up to a 2.1 percent annual rate, slightly above the Fed’s target, but the Fed assured investors all is well. Also, the unemployment rate is falling faster than the Fed’s expectations, but the Fed removed their self-imposed 6.5 percent unemployment rate line in the sand. The revision of U.S, Gross Domestic Product (GDP) 2014 first quarter number showed the output of goods and services decreased at an annual rate of 2.9 percent. While this was the first negative GDP quarter since the first quarter of 2011, the market shrugged off the news as a weather related decline. Positive GDP growth should return in the second quarter.

The market, in its Goldilocks state, gave both bond and stock investors cause for celebration. For bond investors it was lower long-term interest rates and tighter credit spreads. Performance across all bond sectors was positive and the six month numbers would make great annual returns. For the six months ended June 30, 2014 the U.S. Aggregate Bond Market returned 3.93 percent, high yield 5.46 percent and municipal bonds 6.00 percent. Long-term U.S. Treasuries led the way with equity like 12.14 percent return over the past six months. For bond investors 2013 is now a distant memory, but let’s be reasonable and lower future return expectations into the low single digit area.

The stock market rolls along setting new highs with regularity. We have been consistently bullish on stocks recognizing the power of the Federal Reserve, the strength of corporate earnings and the concept of reasonable valuations. As we sit atop the mid-year mountain it would be prudent to caution investor expectations. Our 2014 stock outlook was for high single digit returns. This was based on corporate earnings growing at seven percent, dividends providing a two percent return, and valuations remaining constant. Year to date the S&P 500 is up 7.14 percent, NASDAQ gained 6.18% and emerging markets rose 6.14 percent. Looking forward, the Federal Reserve will likely be less of a market tailwind as they complete their taper program and begin to tackle current inflation and employment trends. Corporate earnings will need to accelerate to achieve the seven percent annual growth and valuations have been stretched to bring the market to its mid-year summit.

At the end of the day, we are long-term investors who believe in properly allocating among diversified portfolios. Our best advice is to set realistic expectations and stay invested for the long haul. Every year the market will experience some form of a pull back or correction. If we get one in the second half of 2014 don’t be surprised, just be confident in your long-term investment plan and stay on course.