Now that we’re entering August, while simultaneously hitting record highs, where should investors focus their attention? Will record low rates continue to drive investors into the market? Or, will lower earnings and fear of the Fed take the wind out of the market’s sails?

It is our belief that the overall market looks extended, but there investors needn't head for the exits. The comfort we get investing in stocks comes from two sources. First, despite the Fed's efforts to raise rates here, globally rates are going nowhere. And, liquidity is very high, which means there's lots of cash in the hands of investors. Now, some very large pools of capital might be stuck in certain allocation dilemmas and, therefore, content buying long bonds at negative rates. But, most of the world doesn't like to give someone money and be willing to wait 30 years to get back less than they gave them. It's rather counterintuitive.

Instead, we believe that rational investors would rather buy stocks that have both positive yields and potential upside returns. Yes, there is risk of losing money. However, when you buy bonds at negative rates there isn't risk of losing money...instead there's a guaranteed loss! Faced with this scenario, stocks stop looking too rich for investors.

The second source of comfort in investing in stocks now comes from the safety net of central banks. True, the global economic recovery remains weak, with fears of problems being numerous and persistent: Brexit causing a UK recession, Italian banks going bust, China, etc. However, it is this weak underpinning of the global economy that gives us comfort in buying stocks. Because, central banks have shown that they will do anything (and I mean ANYTHING) to keep the recovery moving forward. As such, the world will remain awash in liquidity and there will remain a safety net underpinning risk assets such as stocks.

So, with this comfort that stocks, despite mediocre earnings growth and high valuations, remain an attractive investment, where should investors look to put their money? We believe there are a few attractive areas to explore and will touch on two this week.

Our first area of choice is small cap. As the above chart shows, small caps tend to outperform after a first Fed rate increase. We are now 8 months after the fed raised rates and the trend has been working; small caps have had a nice run.

Historically, the run has extended for at least a year from the first rate hike. This would give us a nice runway through year end. We believe that the small cap market, on a relative basis to large caps, still has a lot of catching up to do. And, we think the Fed will remain very cautious and slow in their increases. This means that the period of outperformance may very well be an extended time of joy (a word us small cap investors have missed for a couple years) in small caps and we think this train will continue down the tracks for quite a while longer.

The second area where investors might want to look is Latin America. As the above chart shows, from the lows in January, when this Latin America MSCI ETF was down 26.4%, the outperformance has been huge. We are looking for this outperformance to continue.

And, why is this, you might ask? The answer is one word...Capitalism. From a very high, top down level, we all know capitalism has proven itself as the better economic model. And, while the US might be feeling the Bern and thinking that socialist ideas have merit, they really don't; just as any rich Russian living in NY or London.

But, what does capitalism have to do with Latin America? Well, it has been a quiet, sort of under the radar movement, but capitalist trends are taking over Latin America. We all know that there have been changes in government going on, but a lot of investors haven't put the pieces together to proclaim that the continent is moving more capitalistic. But it is!

Check out this list:

1.Argentina...dumps socialist president for capitalistic one.

2. Venezuela...Chavez is gone, reforms are taking place.

3. Brazil...dumps socialistic president, reforms taking place.

4. Cuba...opening its market to the US.

5. Colombia...makes peace with FARC, trade agreement in place with the US.

These are some of the biggest economies in Latin America and they are all making a simultaneous shift towards capitalism. Throw in commodity prices appear to have bottomed and you've got a secular trend with legs. We believe Latin America, like small caps here in the US, is a place where investors can make some money going forward.

Random Musings From Our Travels...

Looking at Latin America as an investment idea is a great segue into a discussion of the Olympics, which kicked off with their opening ceremonies on Friday night. Despite the prelude being discussions about which golfers and tennis players (funny how it's the country club sports, isn't it?) don't want to attend due to the Zika Virus, and how the athletes facilities are subpar and not ready, at the end of the day this will all be about the sports.

Where are our eyeballs focused? Well, along with the rest of the US, Michael Phelps has become a compelling individual. This time it's not for his dominance, but, rather, to see if, at an age long past where most swimmers have hung up their suits to dry, Phelps can manage to pull out a miracle. Already the most decorated Olympian in history, can Phelps overcome his age and his recent bouts with addiction and add to his medal collection? He is a special man, with a huge heart, and we believe he'll do just that.

Meanwhile, Ross' favorite event of the year, The Tour de France, concluded last month. While it was its typical colorful display of amazing athletes enduring brutal physical trauma to complete the circuit around France, it lacked serious drama. Chris Froome demonstrated that he is by far the most dominant cyclist on the planet.

There has been lots of speculation that Froome's Team Sky was too strong and, as a result, that the Tour should lower the number of riders per team going forward. The thinking being, this would make the race more competitive. Our response is, good luck with that one. Froome looks like he could be a one man team and still win. He was attacked by every challenger at different times and never appeared to come close to faltering as he countered each attack. Froome's dominance resembles that of Lance Armstrong (who technically never won, but we know better...) and the only way he will lose the dominance is if one of his competitors can raise up to his level.

The Tour was sadly marred by a terrorist attack in Nice on Bastille Day. Our hearts go out to the French and to all that have been affected by the increased onslaught of terrorist activities. May each of you, our readers, enjoy your August and your summer travels safely.