Do not be concerned by the recent market pullback

US stocks peaked at a record high on May 21st, 2013, gaining 18% YTD.  Our forecast for the whole year was 8%, so either we were grossly wrong or the markets got ahead of themselves.  We told our clients that a 5-7% correction was totally to be expected.  For the last few months, we've mostly left cash in cash, waiting for a buying opportunity, which in fact may be upon us.

Since the record high, US stocks have fallen nearly 5%, and bonds have sold off as well.  The reason is very simple: the era of near zero interest rates is coming to an end.  There's not an investor in the world who doesn't know this, so there's a hair trigger tendency to sell on the slightest news.  It's as if 50,000 fans at Yankee stadium were half out of their seats, ready to rush to the exits at a moment's notice (someone will get trampled.)  According to the CNN Fear & Greed Index, investor confidence swung from "extreme greed" to "extreme fear" in just one month.

We are not planning on rushing anywhere.  It was only last April-June 2012 that stocks fell 9.8%, erasing the gains for the year (but still closed up 16% by year end.)  Anyone who jumped out of stocks June 1st, 2012 would have missed gains of 31.6% over the next 12 months.

We note that housing prices are on the mend - not soaring as during the bubble but rising enough to shift many homeowners into positive equity and stimulating housing starts.  Housing starts means housing construction, one of a few remaining high paying blue collar jobs that can't be exported.  Housing jobs means higher personal income, which increases spending and employment in service jobs.  The United States has many problems to resolve, but these problems are manageable.  Meanwhile stocks prices are driven by earnings growth, which is also on the upswing.

Read the entire commentary here.