It’s déjà vu all over again" - Yogi Berra

The recent news, which is hardly new or recent, in regard to the financial conditions in Greece has sent global stocks downward – and may cause doubt about the longevity of the bull market. However, we would suggest that those concerns are misplaced. There are a number of issues that could bring this classic bull market to a halt, but Greece leaving the Euro is unlikely to be the catalyst. In fact, our research suggests that though the bull market is aging, there is still time left for investors to capture worthwhile upside. The drama and reality of the problems in Greece are not without implications – but the longevity of the bull market relies on other factors.

As of this writing, global stock market indexes are slightly lower for the year. During this six month period, global indexes have traded in a narrow range – plus or minus 4%. However, throughout this period, global corporate earnings growth has continued to advance – particularly for the companies that you own. This has caused the price earnings ratio of stocks to contract from a high of 17.5 to a very reasonable 16 – suggesting that stocks are not overvalued. All the while, recent economic data suggests that developed economies continue to expand – which should support continued corporate profit growth and higher stocks prices. It is the strength and health of the global economy – not the Greek economy – where investors should focus their attention and in that spirit all appears well.

The greater risk for global investors – whether they are stock or bond centric – is the future level of interest rates. Corporate profit growth and stock markets depend on economic growth and can decline precipitously in economic recessions – think 2008, 2001, 1984…should we go on? The Federal Reserve’s discussions regarding raising rates are necessary and they probably should have been raising rates very gently in recent years. However, when (and not if) they raise interest rates, it will likely have a negative impact on economic growth. So the key for those of us who are following the Fed closely is to monitor the pace and number of rate hikes. In the past, most recessions and significant stock market declines have been a result of Fed policy. So if you want to worry about something – which as an investor you should – think about Janet Yellen and her colleagues at the Federal Reserve rather than Greece.

The recent events in Greece will likely postpone any interest rate hikes in the short term, mainly due to investor confidence. However, the implications of higher interest rates pose a very significant risk to bond funds. As you know we do not buy bond funds. When the Fed raises rates there could be a significant decline in bond fund values – a decline for which we believe most investors are unprepared. Individual bonds with short maturities – which we embrace – should remain safe from this risk.

As we all know, our research and strategy can be derailed by unforeseen events. Therefore, we continue to manage risk through your portfolio’s asset allocation, sector management and the use of carefully placed stop loss orders, all of which are employed to mitigate catastrophic loss.

All of us here hope that you are enjoying the summer and once again want to thank you for your continued confidence in our work. If you have experienced any significant changes in your finances, or would like to discuss your portfolio, please let us know.

Sincerely,

Your Team at Main Street Research