Second Quarter Market Commentary

Greetings from your wealth management team here at Gradient Capital. As we reach the halfway point through calendar year 2014, we have now seen six consecutive quarters of appreciation within most major stock indices. This coupled with appreciation within fixed income assets, due to a recent decline in interest rates, has provided above average investment returns for most diversified portfolios.

Each year, as we move into summer, our clients’ thoughts tend to migrate towards time away with family and outdoor activities. Interestingly, this change in thought pattern has effects on the financial markets. As trading activity drops off in the summer months, market volatility can appear. This, combined with the fact that the S&P 500 index has not seen a correction of 10% or more in 33 months (these events historically have occurred on average every 18 months) may provide an opportunity for the market to decline in the short term. At Gradient, based upon increasing global growth and limited alternative opportunities in a low interest rate environment, we would view such an event as a buying opportunity.

For our retired clients who depend on systematic distributions from their investment portfolios, we see the importance of taking a “total return approach” as it relates to generating cash flow. Reaching for yield, by extending maturities within fixed income, may be a risky proposition (Given our belief that rates will soon be on the rise). We do see the benefit of reducing credit quality slightly, however, given ongoing corporate balance sheet improvements, as a way to increase yield.