Key Points

  • Stocks have been drifting along near record highs and background conditions remain relatively positive in the near term. But seasonal tendencies remain a risk and volatility has picked up a bit, so investors should be on alert for a summer pullback.
  • The U.S. economy continues to glide along, with subdued inflation, providing what typically has been a good environment for stocks. Bond yields have ticked higher and some commodities have recovered, but it’s too early to say that the reflation story is regaining credence.
  • Economic growth around the world has been improved and stock markets have gained but international outperformance is largely attributable to dollar weakness.

Stocks sail along

Summer is a time when some investors may put their portfolios on the back burner and head out on the sailing boat for some fun in the sun. Conditions for stocks appear to be relatively smooth, illustrated by still-low volatility and major indexes near record highs. We believe stocks will move generally higher, supported by solid earnings, low inflation, and a modestly growing U.S. economy, and we certainly don't begrudge investors taking a little rest and relaxation. But below the surface there are developments to heed, including ongoing geopolitical and monetary policy uncertainties. Keeping a diversified portfolio is important, as is periodic rebalancing, as a geopolitical blowup, a monetary policy "mistake," or a major political shakeup could occur with limited warning signs.

As noted, volatility—albeit still low historically—has ticked higher; while sector rotation has been the name of the game lately. Technology and energy stocks have moved lower over the past month, while financials and health care have rallied—again illustrating why paying attention to the makeup of your portfolio, and being mindful of diversification, can be important (and we provide analysis of all 11 sectors in Sector Views).

This rotation, as well as occasional modest pullbacks in the overall indices, appears to be keeping investor sentiment from getting overly optimistic. This two-steps-forward-one-step-back movement is what we believe will help to extend the long-running bull market and, for now, help prevent a "melt-up" scenario. As good as they feel while they're in motion, they don’t tend to end well.