It seems as though the positive, yet somewhat lackluster economic data of the past several weeks has given investors some pause, or at least a reason to consider the valuations which support their equity positions. We have been witnessing a noticeable shift in popularity recently from a bias of the market towards growth and promise to one which is keener on the idea of value and earnings.
Being fundamentally more value-oriented, this trend has translated into better relative returns for the types of stocks that we own, and as a result our clients’ portfolios have responded positively. In addition, lower interest rates have also helped increased the allure of dividends offered by these equities.
So far this year we have witnessed a fairly substantial retreat in interest rates despite the decrease in bond purchasing by the Federal Reserve. The interest rate on the 30-year U.S. Treasury bond has retreated from close to 4.0% at the first of the year to a low of 3.3% last week, a 17.5% move. This shift should help keep economic conditions favorable over the next several months as long as rates continue to remain reasonable, and with the current global economic environment we find it difficult to visualize support for higher interest rate levels.
In order for additional market progress we are going to need to see corporate earnings continue to grow. Current price earnings multiples appear to be reasonable when compared to the prevailing bond market rates, and we would prefer to see them remain that way.
As we move towards the second half of 2014 and into 2015, we believe that our economic well-being will be largely dependent upon the steady continuation of the global recovery and the absence of world events that can temporarily overpower equity prices.
Stocks offer long-term growth potential, but may fluctuate more and provide less current income than other investments. An investment in the stock market should be made with an understanding of the risks associated with common stocks, including market fluctuations. Past performance does not guarantee future results.
Wells Fargo Advisors Financial Network did not assist in the preparation of this report, and its accuracy and completeness are not guaranteed. The opinions expressed in this report are those of the author(s) and are not necessarily those of Wells Fargo Advisors Financial Network or its affiliates. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Additional information is available upon request.