In case investors needed more evidence that the stock market is not the same thing as the economy, July provided such evidence. Stocks around the world produced unusually strong gains and the US stock market (S&P 500) closed at new all-time highs on seven separate trading days in July. Global stocks (as measured by the MSCI All World Index) finished the month up 5.5% for the calendar year - a sharp rally from the lows of February when the same markets were down more than 7% to start 2016.
All of these recent gains come in spite of fledgling economic data, terrorist attacks, contentious political debate, the Brexit vote, and the resulting fear and uncertainty stemming from a bunch of scary headlines. While media outlets and much of the retail investing community focus on headlines such as these and that can drive the stock market in the short run, this summer rally demonstrates again that stocks are driven by different forces. Specifically, consider the following four key drivers of stock prices:
- Interest Rates - Current low rates are supportive of stock prices.
- Corporate Profits - While not stellar, corporate profits have significantly outpaced otherwise sluggish economic growth.
- Valuation - This most important and yet often overlooked predictor of future returns is historically attractive in the emerging world and Europe.
- Sentiment - Market corrections generally follow periods of excessive optimism, not the kind of abundant risk aversion and pessimism we have today.
Although these factors will not always drive short-term market movements, it is important to remember that they are the less glamorous long-term drivers. They may also help to explain why the stock market, as demonstrated in these summer months, often zigs when the economic and political headlines zag.
You can view our monthly market snapshot to see the various market returns and economic data points. As always, we encourage you to contact us if you have any questions about the markets or your portfolio.