Know the flow

Many investors are often baffled when the equity markets should do ‘this’ and do ‘that’ instead.  We have such a stock market today with the S&P and Dow notching new all-time highs last week.  I’ve had many investors ask me why stocks keep rising?  That’s a great question in light of the following headwinds which traditionally equate to lower, not higher, stock prices:

  • Q213 Revenue misses at many large S&P companies including IBM, Microsoft, Intel, General Electric, Coca-Cola, Google, Yahoo and eBay
  • Crude oil is at an 18-month high over $108 per barrel
  • There is a significant decline in GDP forecasts for Q213 to as low as 0.3% from 1.8% in Q1
  • Interest rate trends have reversed and are now heading higher with the 10 year Treasury yield at 2.50%

As an accountant, I’m trained to follow ‘flows’.  There are cash flows and how revenues flow through the income statement to become earnings.  In equity markets I watch the money flow into mutual funds.  Fund managers are paid to invest money as it comes in.  They are not generally market timers.  If they get more money to invest, there will be increasing demand for equities and they will trade higher.  If the pool of equities is stable or even declining due to corporate stock buyback programs and demand from investors increases, the laws of supply and demand dictate that stocks will trade higher, regardless of the fundamentals.  This is the case now.  Look at the chart below which reflects a sharp and steady flow of money into Developed Market Equities (red line):

 

Money is flowing into US equities at the fastest rate since June, 2008 and the pace is accelerating.  While this is serving to stretch valuations and some pundits feel it is risky to invest at these lofty levels, I take reassurance in following the fund flows.  While I agree the risk to further upside in share prices is increasing, as long as there is a ‘greater fool’ looking to push prices higher, I suggest we enjoy the ride until the music stops and we all scramble to find a proverbial chair and leave the market.  Enjoy the gains to be had while others who don’t follow fund flows remain confounded and on the sidelines.

 If you find my market insights beneficial and would like assistance with your accounting and investment activities, please contact me, Christine Meder at Christine Meder’s Accounting Advisory Services.  My email is mederchristine1526@gmail.com and you can tweet me at @christinemeder1.  I’m offering a free 30 minute consultation during the month of July.  #unrbrand

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About Christine Meder
Leveraging my insights and professional experience of 25 years in the accounting profession, I and my firm Christine Meder's Accounting Advisory Services provide our high net worth clients expert advice on their business activities and investments. In addition to performing traditional accounting functions in a confidential manner, I pride myself in giving clients a competitive edge whether it be in running their businesses or managing their investment portfolio. My studies leading up to completion of the EMBA program at the University of Nevada, Reno this August provide me with latest skills and techniques utilized across a broad spectrum of business functions. This breadth of education is complemented with experience as an accountant in the construction, mining, real estate and technology fields during my career. If you are looking for a trusted adviser or consultant in addition to someone you can rely on to properly keep your books, please contact me.

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