Over the past six weeks, many investors - including yours truly - expected stock prices to experience a pullback after the significant advance from the March lows. Instead, stock prices have simply traded sideways giving little back and making little headway. At the same time, interest rates have risen dramatically. Ten year Treasury yields have advanced a whopping 33% to nearly 4%. The recent behavior of stock prices and interest rates are further signs that - as we have been expecting - the global economy and stock market cycle are in recovery mode.

In the past six weeks, stock prices have been very resilient. Our research indicates that many investors had expected a pullback in stock prices following the big advance in March and April. However, no such correction has come to fruition. Interestingly, our work shows that there has, in fact, been significant stock market selling over this period. However, this selling has been met by very strong institutional buying, causing stock prices to simply trade sideways and not give up any ground. This is the sign of very strong stock market internals and is reminiscent of past stock market recoveries. One need only to review the end of the past 5 bear markets to see very similar circumstances. In each case, after stocks bottomed, prices initially advanced significantly, paused, and then significantly advanced once again. The past six weeks may be a similar “pause that refreshes” - allowing stock prices to once again advance. We have recently made additions of stock to your portfolio and have plans for further additions given these circumstances. Our research suggests that this “pause” may continue for a little while longer and that an outright correction in stock prices is still a possiblity. Therefore, we continue to make our purchases in phases and manage risk through your portfolio’s allocation to stocks, sectors and stop loss orders.

The significant rise in interest rates is creating attractive opportunities in the bond market and is a further sign that the global economy and credit markets are in recovery mode. As a bond investor, we can now purchase high quality bonds and lock in more attractive rates than we have seen in years. This period should allow us to add greater value and higher returns in fixed income. Most importantly, the recent and significant rise in rates is further sign of the beginning of global economic recovery. When economies begin to heal from recession, it is common that interest rates begin to rise as credit markets heal and the economic decline becomes muted. It is very important that we assume that the economy will be in a healing process for the next few quarters. Expect that unemployment and other economic data will not be great - it will likely stop getting worse - and that financial markets going forward should perform better than in recent years.

We look forward to this new global economic stock and bond market cycle and will be working hard to position your portfolio to take full advantage of opportunities. If you would like to discuss these issues further, please feel free to contact us.

Sincerely,

James E. Demmert
Managing Partner