August 10, 2017

In my previous Market Insights I had mentioned that July typically averages a positive return for the S&P 500 equity index. I am glad to say that statistic held true to form. Total return for the month of July was a very respectable 2.1% for this popular index. Year-to-date ending July 30th, the S&P 500 index shows a total return of 11.6% compared to the Barclays U.S. Aggregate Bond index up 2.7%. With the Federal Reserve rate increases moving short term rates up slightly and global demand keeping long term rates down, shorter fixed income maturities have returned less and longer maturities more, but all are positive year-to-date.

As of this morning, 90% of the companies that make up the S&P 500 have reported second quarter earnings. It has been another strong earnings season. Earnings growth for these companies is averaging 11.4%, with 73% of them reporting bottom line results that were better than expected. Sales growth for these same firms is averaging over 6%, which is outstanding considering top line growth has only averaged 1.3% over the past three years. Also noteworthy is that company guidance for future earnings has been more positive than previous quarters. Last month I stated that “equity prices still have room to move higher if we see continued earnings growth supported by a growing economy.” We received the first read on gross domestic product (GDP) last week showing our economy grew at an annualized rate of 2.6% in the second quarter. So perhaps the continued upside in stocks is not all that surprising.

What may be surprising is a pullback when one eventually appears. I am not speaking of a bear market, which is a drop of 20% or more from a previous high. For now, there is too low a probability of recession to expect an end to the current market cycle. Corrections and pullbacks are less severe declines than a bear market. They occur during bull markets and can provide attractive opportunities for investors. Though they are an inevitable part of investing, when markets decline it can still be unsettling for even the most risk tolerant investor. Consider that we have now gone 545 calendar days without correction, which is commonly referred to a decline of 10% or more from the previous high. Furthermore, it has been 408 days since the market had a pullback of 5% or more and 278 days without a drop of even 3% or more. Market analysts (myself included) regularly warn a pullback might be due. Yet when they occur, it often seems to take everyone by surprise. It might be helpful to anticipate that whenever the next one does happen, it may feel worse simply because we have not experienced one for such a long time. So, I am encouraging you ahead of time. Whenever downside volatility does reappear, it will be vital for the health of your portfolio to push aside emotion, shut off the media panic, and keep focused on the long term.

Please explore our website to catch up on prior issues of Market Insights and visit to find articles relating to financial planning, taxes, and much more in our BFG Newsletter articles.

Linda S. Parenti, CFA
President & Chief Investment Strategist

Views and opinions expressed here are for informational and educational purposes only and may change at any time based on market or other conditions or may not come to pass. This material is not a solicitation to buy or sell securities and should not be considered specific legal, investment, or tax advice. The information provided does not take into account the objectives, financial situation, or particular needs of any specific individual. All investments carry a degree of risk and there is no certainty that an investment will provide positive performance over any stated period of time. Equity investments are subject to company specific and market risks. Equities may decline in response to adverse company news, industry developments, or economic data. Fixed income securities are subject to market, credit, and interest rate risks. As interest rates rise, bond prices may fall. Past performance is no guarantee of future results.