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The three major U.S. stock indices, the Dow Jones Industrial Average, the S&P 500 Index, and the Nasdaq Index are selling at or near all-time highs.  With the markets at these lofty levels where do they go from here?

I think that the U.S. stock markets will continue to rise as the year progresses.  Corporate earnings were slow in the first and second quarters of the year, but are expected to increase in the third and fourth quarters.  This is positive for the equity markets.  Consumers are continuing to purchase large ticket items like automobiles and appliances which is also a good sign for the stock markets.  Finally, the housing market is showing signs of strength.  Since a house is generally one of the largest assets held by Americans, this increasing strength makes investors feel “wealthier.”  I think that all of the trends listed above will continue through the remainder of the year, which is why I think the stock markets are headed higher, even though they are selling near record highs.

The U.S. bond markets have also been very strong in 2016.  I expect interest rates to slowly rise by the end of the year.  The 10 year US Treasury Note is currently yielding 1.53% and I expect that to rise, probably to the two percent range by year-end.  There are several reasons why the yields on US bonds are so low.  One is that the Federal Reserve has indicated that they will raise interest rates once in 2016.  At the beginning of the year the Fed was predicting four rate hikes in 2016.  With mixed economic data, the Federal Reserve does not want to raise rates too quickly.  However, it does appear that that the economy is growing fast enough to warrant at least one rate hike this year.  Another reason for the strong bond market is that many countries including Germany and Japan now have negative interest rates.  That makes the 1.53% yield of the US Treasury Note look extremely attractive.  A third reason for the strength in the US bond markets is a flight to safety.  Social and political uncertainty make investors nervous and therefore they want safety in their investments.

With the US stock markets near record highs and US bond yields hovering near record lows, what is an investor to do?  Obviously it makes sense to take some profits as the markets continue to rise.  With that said, there are areas of the markets that continue to look attractive.  Stocks like Johnson & Johnson and AT&T have been in favor this year due to their higher dividend yields, upside growth potential, and increasing dividends.  There are many dividend growing stocks that still appear attractive although that number is dropping as the markets continue to reach new highs!  There are also other areas of the stock market that still look undervalued.  In the bond markets there are also pockets of opportunity.  Depending on an investor’s time horizon and risk tolerance, there are several areas of the bond market that provide higher yields than the 10 Year US Treasury Note.  Overall, I remain positive on the US stock markets and portions of the US bond markets.