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A Mid-Summer Night's Prognostication

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It’s time for a little crystal ball-gazing.

As I ready for a round-the-world, 17-day jaunt with my oldest son, Troy (he’s a 17-year-old high school student making a documentary on genocide), several clients have asked me for my opinion of the markets.

First off, I expect to see a bit more red for stocks. The downtrend has been quite orderly so far – as witnessed by still-tepid readings on the VIX – and there has been little technical damage to the indices at this point. We could likely test the lows from March, and even breach them, but I don’t foresee much pressure from that point.

The reason is still-strong fundamentals. Although GDP will be revised downward, it will still be positive (hence, no double-dip recession). Stock market valuations are still reasonable, as the P/E ratio of the S&P 500 is around 13.2, comfortably below the five-year average of 14.9 and the 10-year average of 16.7, according to CRB Futures Market Service. Equities may not be flashing a rapid “buy” signal, but they certainly are not a raging “sell.” Well-diversified investors should weather the summer doldrums quite well.

We are certainly facing significant headwinds domestically. Rising energy prices, high unemployment, and a stubbornly weak housing market are acting as anchors on the current recovery. But we are still in a recovery, and that should keep market volatility somewhat dampened in the next three weeks.

I am grateful for the opportunity to travel with my son this summer, and will be back in the office on June 28 with (hopefully) a fresh perspective on life and the markets, and a renewed sense of thankfulness for all we have in this great country. I will attempt to blog during my absence, but no guarantees!