There is an old story about a college girl who writes her parents with some bad news. She is getting a D in English, she has fallen in love with a man now in prison. She is pregnant and wants to keep the child, so she is quitting school. At the end of the letter, she confesses that there is no man, she is not pregnant and she is not quitting school. She is however getting a D in English and just wanted her parents to see this problem grade in the proper context.
This story is told to show how bad news can be taken in a certain light to be good news. Recently, the stock market has found some life, but it was in response to bad economic news – a slowing global economy, negative expectations on earnings, and a weak jobs report. All of these factors indicate that the Fed will be less likely to raise interest rates. While this might move the stock market up in the short term, the true driver of market values is earnings. We are just beginning the start of the earnings season. There are always some surprises, but the overall expectation is slightly negative.
We have been stuck in a range bound stock market, between a specific high and a specific low, for a while now. Occasionally, the market runs up, just to find weakness and test the bottom of the range again. However, there are several statistical measures of risk that continue to concern us. Our model portfolios each respond to different statistical ques, but collectively they currently show a strongly defensive theme. So overall we still remain cautious. There are some bright spots, basic materials and energy appear to be close to a bottom and weak interest rates have allowed us to buy bonds, at least for a while.
Thanks again for your trust and patience.
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