Summer Client Investment Letter {Part II}

Here is part II of our summer letter to clients.

Markets do face some headwinds.  Many of these are currently foreign related. Historically it seems that many crises begin in the summer months and come to a head in autumn.  Russia/Ukraine and Iraq/Syria/ISIS are examples of potential disruptive flashpoints. The areas getting the most airtime and ink have been the meltdown in the Chinese stock markets, the ongoing crisis in Greece and the issue of Puerto Rican insolvency.  I will briefly comment on these last three.

Greece has a listed economy somewhere in size between New Mexico and Oregon's GDP.  It amounts to about 1.3% of the European Union's total output. Greece's problems belong to Greece and Europe.  They do not affect how many diapers, cars or jeans sold here in the US.  China’s stock market has recently corrected about 30% in a very short period of time.  That, however, needs to be viewed in the context of a nearly 150% appreciation in 2015!  That by the way is not a misprint.  Such a run-up makes a 30-50% pullback look somewhat understandable.  The issue from my understanding is that many small investors have bought near the top and are facing significant losses. Many of these small investors also appear to have borrowed money to buy stock.  That's a disaster for those people and also for the Chinese government for letting it happen.  But Chinese investors who bought earlier this year are still sitting on some handsome profits.  Puerto Rico’s debt issue is a large financial problem for the people living on that island and an issue for investors who loaded up on the island’s bonds in order to boost yield.  It is tiny though in relation to the rest of the municipal bond market.  While there may be some short-term issues overseas, we would also point out that in spite of the volatility outside of the US, valuations remain attractive abroad with compelling dividend yields.

Here at home we will need to see how the US economy fared in the 2nd quarter and what our domestic expectations for the rest of the year.  We will need to see how investors respond to corporate earnings.  Then we will have to again focus on whether the Federal Reserve is going to raise interest rates in September.   Finally there are market seasonal factors for us to work through.  Much of Wall Street is going to be on vacation at the beach between now and Labor Day and that has the potential to magnify small problems into something larger.  Some of these issues could be mitigated by an economy that seems to be growing at a faster pace than analysts forecast a few months ago.  Owing to seasonal factors and the potential for something unexpected to wash ashore {remember we’re also now in hurricane season!} We’ll have defensive pages of playbook ready just in case.  

{Tomorrow we'll talk about why we're still positive on the economy and stocks longer term.}

*We have exposure to foreign markets personally and in client accounts via ETFs.  These positions can change at any time.