Despite the downward volatility of the stock market in the last days of the month, we see no serious threats to our long-term allocation formulas. In fact, our Fun Stocks Index, which we presented in July 2013, has gained 29.49% since that date (1 year ago), while the S&P 500 (SPY ETF) gained only 13.14% in the same time frame. This is an astounding 124% difference!
Therefore we urge our readers to add – albeit slowly – to their Fun Stocks Portfolio holdings.
What Happened in July?
Does good equal bad? Despite a better-than-expected 4% increase in the Gross Domestic Product (GDP) in the second quarter and generally better-than-expected earnings from Corporate America, the U.S. stock market took a nosedive of 2% on the last day of trading (July 31). This resulted in a negative return of 1.05% for the broad S&P 500 index for the month. The Dow Jones 30 also took a negative hit for July (-1.55%), but the technology-laden NASDAQ managed to gain 1.18% this month.
It seems that the stock market doesn’t like good news, because it interprets positive economic data as ammunition for the Federal Reserve to act on raising interest rates sooner rather than later. Higher rates reflect a growing economy that can be sustained without Federal Reserve stimulus, so they should be welcome news. Bear in mind that higher rates are coming, and the sooner the stock market gets used to the eventual removal of the “zero interest punchbowl,” the healthier the stock market gains will be. For healthier investment returns, stock price gains should be based on real profit growth and not just low interest rates. If the stock market becomes mostly dependent on low interest rates, we may be in store for some more downward drifts.
For the short-term, if the markets do drop more, investors with cash should add to the quality holdings suggested in the Fun Stocks Index and to the equity positions suggested in our TSOA retirement account portfolios.