The Stock market hit an all-time high in July and I think the bull market will continue for a while.

Of course, a caveat that there could be a correction is always worth mentioning.  Global political conflicts – Ukraine, Gaza, and Iraq are all making investors nervous.  Any one of those conflicts could escalate and a market decline could ensue.

My sense is that if these conflicts do push the market down (I’m not convinced that they will) the decline would be contained and short-lived.  The trouble-zones are not in places that threaten the global economy and as such have more of a psychological impact as opposed to an impact on the real economy.

Speaking of the economy, how is it doing?  There is a real and signifiant concern that any economic growth we are seeing is the result of accommodating monetary policy from the Federal Reserve as well as the ECB, Bank of England, and the Bank of Japan.  I’m certain that monetary policy helps but I think there is a “real” improvement in the economy.

Corporate earnings have been impressive for the 2nd quarter.

According to FactSet, 230 of the S&P500 have reported and of these 76% have reported profits above expectation and 67% have reported sales that exceeded expectations.  The earnings growth rate for these companies was a decent 6.7%.  In addition to the 2Q14 profit reports, another indicator to look to for clues as to the health of the economy is the direction of transportation stocks.

Economic data that makes the popular press like the Consumer Confidence Index and the Purchase Managers Index are based on survey data.  Respondents to surveys often express what they feel as opposed to their “real” situations.

In contrast, data derived from actual activity, like shipments, may provide better information.  The performance of the Transports I think reflects this actual type of data. The picture here is very positive.

The Dow Jones Transportation Index is up 15.7% this year despite high fuel costs and global crises in the Middle East.

The Transports are up almost twice as much as the Dow Industrials.

I can’t leave a conversation without mentioning valuation.

While the bull market is “long in the tooth”, valuations are not over-stretched.

FactSet figures forward 12-month S&P500 earnings to be $127.71, which means that the forward P/E for the market is 15.6.  This is above the 10-year average P/E for the market of 14.1 but nowhere near the frothy P/Es seen during the Tech Bubble where forward P/Es were around 25.

With 1/2 of the S&P500 yet to report, we need to be careful. So far we have good corporate profits, strong Transports, and valuations that are not excessive.  This is conducive to higher stock prices.

If I have a concern it continues to be China.  HSBC released a surprisingly positive report on manufacturing which gives me a short-term sigh of relief but in the future, I’ll write why I think China might be what trips up the bull market.

— Ian Green, Pendragon Capital Management

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Note: This blog article is intended for general informational purposes only. Nothing in it should be construed as, and may not be used in connection with, an offer to sell, or a solicitation of an offer to buy or hold, an interest in any security or investment product.