Stock market continues to climb the wall of worry

Markets have been up and down to start the summer as investors wrestled with oil prices, a volatile technology sector and central bankers reaffirming their intention to gradually raise interest rates. Stocks were mostly higher in early June, but selling in the larger cap technology stocks reversed many of these gains causing a headwind that kept stock prices mixed. The Dow and S&P 500 were up, but the tech heavy Nasdaq was down nearly a percent.

The Fed’s announcement of an interest rate hike in June was expected. They also announced that they were going to gradually reduce their balance sheet which would have the effect of further tightening. What was new, though, is the hint from the European Central Bank that they would begin doing the same, perhaps signaling the end of their accommodative monetary policy. Stocks eventually recovered a bit, especially the technology sector. Strong housing date also bolstered economic optimism.

Financials and Health Care were the strongest sectors. Banks tend to do better when interest rates are higher as they can charge more for loans. Health care stocks rose on improved profitability. This is a welcome development as this signals broad based economic strength. For the year, the S&P 500 is up 8.21% and the Nasdaq is up 14.21%. This is the best first half performance since 2013.

What’s surprising is how resilient the markets have been in the face of valuation concerns, interest rate hikes, mixed economic data and geopolitical risks. Further, there has been disappointment in the lack of legislative success to enact tax and healthcare reform and infrastructure stimulus measures. This is not unusual historically, as markets often climb a “wall of worry.” Nevertheless, the news flow in the past year has come fast and furious and has certainly given investors a lot of information to digest.

The positives going forward are an improving global economy, better corporate earnings and a still low interest rate environment. In particular, inflation has remained contained even in the face of low unemployment. Based on past experience, we should see increased labor costs and higher prices for goods and services, but it hasn’t happened, allowing for an extended period of low interest rates.

This development is a global phenomenon and has vexed economists and central bankers as textbooks say an improving economy and falling jobless rates should lead to higher inflation. Clearly we are in era where traditional metrics have changed. Perhaps there are factors in technological advances that we don’t yet understand.

D. Scott Peterson, CEO and head investment manager for Peterson Wealth Management, may be reached at 775-673-1100/775-423-8007 or at www.PetersonWM.com.