Volatility Continues as Gradual Recovery is Predicted

If there is a way to protect your stock holdings from volatility, no one has discovered it yet. July's stock market gyrations showed the dual effect of good earnings news coupled with disappointing economic data. In mid-July, the Federal Open Market Committee released the minutes from its June meeting, suggesting the recovery will continue at a slower pace than originally projected. The report showed that some committee members have downgraded their forecasts on economic growth, and that inflation and employment rates are expected to be lower than levels consistent with their mandate. On an optimistic note, they foresaw that appropriate monetary policies could bring both employment and inflation to levels consistent with the Fed's objectives. Overall, the markets ended the month positively. Investors helped major indices push through their 200-day moving averages, an indicator that is viewed as a positive sign for future strength. The Dow Jones was well above its 200-day average by July 27 -  encouraging news for analysts and investors alike.

The latest round of corporate earnings has yielded good news, with DuPont reporting a second-quarter profit nearly three times more than this time last year. Financial stocks were strengthened by European banks - USB and Deutsch Bank - that posted earnings beating estimates.  Positive news also came from the housing sector, with Standard & Poor's Case-Shiller home price indices showing prices rising in May. The Case-Shiller data (from 20 cities) showed a 1.3 percent increase compared with April's numbers. On the downside, the energy and materials sectors were weaker - with U.S. Steel shares showing a 6.4 percent decline in response to second-quarter results that reflected a slow economic recovery in Europe and the U.S.

A trading pattern known as "pull and push" was in evidence, with investors heartened by several corporate forecasts yet pulling back from consumer stocks, fearing the effect of declining consumer confidence. Mixed news from government and private sector organizations fueled this trend. Key reports indicated:

• Consumers continue to be careful when it comes to discretionary spending, with spending declining 0.5 percent in June - down for the second consecutive month. The most significant declines were recorded by car dealers and gas stations, with sporting goods, furniture and building products stores also showing a decline in retail sales. 
• The consumer price index declined 0.1 percent in June, with decreasing energy costs leading to the overall drop off. Core CPI categories, which exclude the more volatile food and energy costs, increased 0.2 percent, reflecting increased prices for apparel, medical care and cigarettes
• Business inventories rose for the fifth consecutive month, increasing 0.1 percent in May. Retailers and wholesalers saw increases in surpluses, and manufacturers decreased their stockpiles.

You can't time the market. And analysts suggest that investors resist the urge to allow ever-changing market conditions to rule where you invest. However, they do suggest you pay attention to your asset mix - allocation of funds into stocks, bonds and cash. This won't assure profits or protect against declines, but in a gyrating market rebalancing the mix to stay in line with your targets could moderate the risk of serious losses. Seek professional advice from your tax and investment experts to keep your asset mix in line with your retirement plans and risk tolerance.

These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.

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