Second Quarter Review

June 26, 2014

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US Stock markets reached new highs on major averages during the second quarter of 2014. The momentum in the stock market was driven by a number of factors. We will recite an abbreviated list.

  1. The short-term interest rate remains close to zero.
  1. Long-term government bond rates fell when they were expected to rise worldwide.
  1. Reports of worldwide inflation continued at very low levels in most jurisdictions. In Europe, the inflation rate is now recorded at 0.50 percent.
  1. Central bank policies continue to be expansive. Even though the Federal Reserve (Fed) is tapering, it is still expanding excess reserves and acquiring assets onto its balance sheet.
  1. The federal deficit continues to shrink. It has gone from a run rate of $1.4 trillion at its peak to an annualized run rate of $400 billion, and the number if falling.
  1. The growing US energy self-sufficiency is evolving and is resulting in shrinking trade and current account deficits. We do not import as much oil and energy as we used to. We produce much more. The trends continue in that direction. That means that dollars do not flow abroad; therefore, those dollars do not have to be attracted back to the US by higher interest rates or other investment returns.

The combination of these factors continues to support equity prices. On a comparative or relative basis, stocks still seem attractive. Slow growth and low inflation in the economy continue to support an expansion of American corporate earnings.

The bottom line is that the stock market is still in an uptrend, as data in the second quarter of 2014 confirm. We were fully invested for most of the quarter. Geopolitical risk is rising worldwide. To be more prudent we have raised some cash reserve during the second half of June.


The ideas and opinions expressed in this blog are those of the author, and they should not be perceived as investment advice or as any other kind of advice.

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