Before our summer break, in mid-June, we looked at the chances for the American stock market to weather the “sell in May and go away” phenomenon. At that time, markets were in pretty good shape as all segments were holding strong, from small-caps and high-tech stocks to large caps. Over the past month, the strength has been fairly stable, and as a result, the first half of 2014 turned out to be quite successful for the U.S. stocks: the S&P 500 index grew by 6.1% while the NASDAQ Composite went up by 5.5%. The first half of the year was even better for many Canadian stocks with the S&P/TSX Composite Index rising by 11.8%.
Three weeks ago, we also noted investor interest in bonds, where prices remained strong, especially high-yield or “junk” bonds. This kind of simultaneous strength in stock and bond prices is unusual as these two classes of assets often move in opposite directions and investors move their funds between these two asset classes. This phenomenon continues. According to marketwatch.com, Bespoke Investment Group has calculated that a rolling six-months correlation between S&P 500 and futures on the U.S. 30-year bond is currently at a four-year high, 0.60. This has really been a phenomenon of the past several months, while the relationship between American stocks and bonds was inverted last year.
As usual, after such strong run-ups for different assets, investors are becoming wary and cautious (mind you, many investors have been expecting a market correction for over a year now). Billionaire investor Carl Icahn said yesterday that U.S. stock market investors should be careful and selective about U.S. stocks. This happened on the background of a hiccup in the markets last Thursday on concerns about the decision of one of Portugal's big banks to delay a debt repayment which served as a chilling reminder about problems in the European banking sector. The S&P 500 index fell by 1.0% at one point that day. At the same time, many investors see yesterday’s drop as short-lived thanks to a stronger U.S. economy where the number of people who applied for unemployment benefits in the first week of July, fell to a seven-year low.
By: Ukrainian Credit Union Limited
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