For some reason, the day after Labour Day always feels like the start of a new business year. People are back from holidays, cottages are being closed and it’s time to get refocused on business.

If you were distracted by all the good weather, the market actually had a pretty good summer after getting a little jolt from Britain’s decision to leave the European Union.

Consequently, we thought we might try to pull it all together for you. We’ll start with the general consensus on the market, then give you our views and finish by trying to elaborate on the bull and bear cases for equities. Along the way, we’ll work in some comments on the Federal Reserve’s interest rate policy and the upcoming U.S. Presidential election and other popular concerns.

After Britain’s vote to leave the European Union on June 24th, opinions about the future ranged from this being as significant as the 2008 financial crisis to nothing is going to happen for the next two years.

We’ll concede that it was a significant event, but having observed how Europe has handled several crises in the last few years, we tend to agree with Ned David Research that summarized it by saying,

“Brexit will be dealt with in typical European fashion: with a compromise that changes nothing,
satisfies no one and kicks the can down the road.”

That said, the event has called into question a number of factors that are influencing the market from Central Bank policy to economic growth. So it’s probably worth spending a little time sorting out what is fact and what we can and what we cannot expect going forward.

It’s hard to not have your stomach in your mouth after the bungee jump the market took in the first quarter. That kind of volatility makes it difficult to figure out where we go from here.

Nevertheless, we’re still positive on this market in the long-term relative to our other investment options.

Let me give you our rationale but first let’s start sorting out reality from all the noise by putting this market into perspective. Then we’ll take a look at the three factors that will determine where this market is headed: the Federal Reserve’s Monetary Policy, the economy and valuation.

I’m frustrated. Maybe it’s due to the tough market environment but deep down I think it’s probably because of a conflict between what my head is saying and what my gut is telling me.

Let me start with what my instinct’s sense before taking a little more rational approach to the issues.

My gut has been saying: Look, this market has been on a roll since March, 2009 with only a bit of a shake in 2011. M&A activity is at an all-time high which correlates with market tops and I think there are probably some problems that will surface in emerging markets due to weak commodity prices and the soaring U.S. dollar. Otherwise the market has been straight up. It’s overvalued and we’re due for a correction, which we’re now starting to get. That said, there is reason to believe that we’re further into a setback than most recognize. Nonetheless, volatility and fear don’t seem to be extreme enough to set a solid bottom and valuations still need to come down by about 10% just to get us to fair value, let alone cheap.

Who am I to say the Fed was wrong? But it sure seems like they missed an opportunity at their September meeting to end this ongoing debate as to when they will eventually raise interest rates. Instead, we now seem destined to endure another few months of watching the “talking heads” on CNBC debate endlessly on an issue that should have been resolved by now.

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We’ve put a twist on President Bill Clinton’s campaign slogan “It’s the Economy – Stupid”, suggesting investors stay focused on what’s driving this market: namely corporate buybacks and mergers and acquisition activity.

For sure, there are a lot of headlines to worry about especially regarding Greece and China’s stock market. I won’t dismiss them, but Greece seems to be on a path to resolution even if it might only be temporary. All told, it’s estimated that the country owes about $540 billion, spread among bond obligations, central bank’s liquidity assistance and interbank balances. A default would require some of the institutions that have lent Greece money such as the European Stabilization Mechanism (ESM), which is a corporation, and the European Central Banks (ECB) to recapitalize themselves. Given that the ECB has been a buyer of bonds, this would probably be pretty disruptive to the European Monetary policy.

China is also a wild card. Their domestic stock markets have risen about 150% since last year. However, they’ve collapsed almost 30% since mid-June, wiping out an estimated $4 trillion of value. The cause of the decline is being blamed on forced liquidation from margin calls where loans to support equity purchases surged five-fold to $323 billion since last year.

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To some extent this market reminds me of the old joke about the hypochondriac that had the epitaph “See, I told you I was sick” inscribed on his tombstone.

Some predictions are eventually right. Similarly, valuations will warn us of a market top. The trouble is, it is notoriously bad at timing and can’t be quantified as to how high is too high. Markets can get more expensive than one could imagine (think “tech bubble” in 2000) and stay there for much longer than one might expect. Unfortunately, this is also true at bottoms when the market can get cheaper than predicted and stay there longer than warranted (now think the 1970’s).

Greece is back in the headlines. Do troubles in Russia and a collapsing ruble remind you of 1998 or does a Saudi Arabian led oil price war look like the 1980’s all over again?

Because we’ve seen this before, the market isn’t over reacting. But throw in a few other uncertainties such as a change in the Federal Reserve’s monetary policy, the effectiveness of the European Central Bank’s renewed monetary stimulation and potential deflation in Europe, and you have enough uncertainties to give investors pause and potentially impair the market valuation, the best gauge of investor sentiment. This is especially true when you include some contagion risk that adds the potential for any of these issues to metastasize into something more problematic.

Warren Buffet says that “being early and being wrong look exactly the same 99% of the time.” So, are we in a market correction or have we seen a major top? They’ll initially look and feel the same.

A market decline is always predicated on a change of opinion for the worse. The difference between a correction and a bear market is when the changed opinion isn’t vindicated, where the fear of recession is proven wrong, the fear of a banking collapse doesn’t happen, or the fear that Greece will leave the European Union is overestimated.

Are we in for a correction or are we seeing the top of the market before it rolls over into a bear market? That seems to be the question on everyone’s mind. Even those who are long-term bulls on this market are cautious at best. I have read very few comments like I did in 2000 or 2007 about a market that is headed for the moon on the back of the “New Economy” or “Peak Oil.” We’re not at that stage yet, so the skepticism we’re seeing is good.

So where do we stand? Well, I’m starting to sound like a broken record, although I’m not sure my grandkids would know what that means. Regardless, I’m cautious as well and think that the market is at best, fairly valued with some symptoms of overvaluation. However, I also believe that we are still in a long term bull market that won’t end until we’re solidly overvalued.