2014 Second Quarter Market Statistics (March 31, 2014 to June 30, 2014):

• Standard & Poor’s Stock Index:  1960 vs. 1872, up 4.7%
• Ten-year US Treasury Note yield:  2.52% vs. 2.72%, down 20 basis points
• Gold:  $1,322 per ounce vs. $1,284, up 3.0%
• Crude Oil:  $106 per barrel vs. $101, up 5.0%

US stocks advanced in the second quarter, as solid employment data and continued low interest rates provided a supportive environment for shares.  The yield on the benchmark Treasury note declined (prices increased), as bonds responded to more muted economic data outside of employment.  Gold rallied on the back of lower bond yields, firming inflation data, and turmoil in Iraq.  Oil increased as events in Iraq had the potential to affect world oil supplies.

While the benign climate for US stocks described above could certainly persist, there are risks to be aware of:

  1. As we have noted before, the most significant risk to a continued rally in stocks would be a more hawkish policy stance from the Federal Reserve, which is to say the possibility of higher overnight interest rates sooner than markets expect.  This would be in response to acceleration in economic activity and/or inflation.  Currently, the economy appears too tepid to warrant higher interest rates in the near term.
  2. Recent events in Iraq could affect oil supplies if the Sunni jihadist group ISIS were to reach the southern oil fields of the country.  Higher prices could crimp the global and US economies, and US shares would not go unscathed.  Fortunately, the jihadist advance looks to have stalled north of the capital Baghdad.  Given that the south is unfriendly territory to the jihadists, and the threat of US airstrikes, we believe an advance on the southern oil fields is unlikely.
  3. The Chinese economy is built to a large extent on the shaky foundation of real estate speculation.  While predictions of a Chinese recession have been voiced incorrectly for many years, the precarious nature of their financial system bears watching.  China, as the world’s second largest economy, is an important global economic player.  Chinese economic weakness could negatively impact the global economy and the profitability of American businesses.
  4. Finally, the US political system continues to be dysfunctional.  Normally bipartisan programs such as the Federal highway bill and the Export-Import Bank, are being held hostage by partisan rancor.  With an economy that remains stuck in low gear, and monetary policy that has done all that it can, constructive fiscal policy is an important element in accelerating economic growth.  Unfortunately, the likelihood of such policy is minimal at best.

Going forward, our base case is that the US stock market continues to grind higher.  However, as described above, there are multiple threats to this forecast.  For the remainder of the year, we see the US stock market, as measured by the S&P 500 stock index, to trade in a range of 1825 to 2075 (currently at 1960).  We expect the yield on the ten-year Treasury bond to trade in a range of 2.25% to 3.00% (currently at 2.52%).