It’s official. The markets have recovered every dollar lost since the beginning of the financial crisies and the onset of the Great Recession. Congratulations are in order for all those investors who stuck with the equity market but what about those who didn’t?
Until recently, bond investors have not done too shabby either. Thanks to the Federal Reserve Bank and its low interest rate policies, debt holders enjoyed substantial gains in bond prices. That cycle is over in my opinion. The issue for bond holders is when to get back into equities.
For those on the outside, it is hard to chase the markets, especially when the S&P 500 Index is already up almost 10% since the beginning of January while the Dow is up 11.2% and the NASDAQ up 8%. Investors waiting for a pullback before buying stocks continue to be disappointed. Every minor sell-off has been met with additional buying. There is a good chance that breaking the old high in the S&P 500 Index this week could trigger a further flurry of buying that could send that average up to 1,600 in short order.
But even the most enthusiastic bulls are starting to get nervous with this market that won’t quit. It so happens that April is now upon us. The springtime has not been kind to equity investors over the recent past. For four years in a row we have entered this month with substantial stock market gains. In the last three years, we hit a wall of profit-taking that drove the markets down by as little as 10% and as much as 19%. Will we experience the same thing this year?
History, especially short-term history, does not have to repeat itself, but it often does rhyme.
So what could cause a bout of selling this year? Quarterly earnings are always a great excuse. Investors might be disappointed if enough corporate managers give lukewarm or even bearish guidance about their future earnings potential. They could, but most of the economic numbers are indicating growth, not contraction.
Bad news out of Europe might take us down. The recent negative developments in Cyprus could have provided an excuse, but so far Cyprus has proved to be at most a momentary blip in the U.S. markets. A year ago the same developments would have taken a large chunk out of the equity markets, but times are changing. It appears that most of Europe is getting their act together.
Bears point to the fact that this quarter the sectors that have done the best—healthcare, utilities and consumer staples—are all defensive areas. That could be worrisome since bull markets are usually not led by defense. Technology, financials, even materials, would typically lead the markets if this were a normal market. But when has this market been normal?
Any of these potential negatives could sink the markets in the short term. I believe any sell-off will be contained because there is a mountain of money waiting for just such a dip to buy in. As long as the Fed keeps stimulating the economy the stock market will remain an attractive area for investors, despite any short term volatility.