As this first
quarter draws to a close the equity market continues to dance around the 1850
level (as measured by the S&P 500 Index) and it’s beginning to look as if
it may be some time before stocks start moving up again. This would not be the first time that this market
has become stalled around a price level.
Back in 2011, the S&P 500 Index was trading around the 1250 level for
the entire year and ended the year flat versus the closing price on December
31, 2010. We don’t expect another year of a market
trapped in a range and ending the year unchanged, but we wouldn’t be surprised
if the markets went through the first half of this year without much progress
being made.
Fortunately, we haven’t suffered any deep declines in the broad indices, although on a sector by sector basis the returns have been very wide for what has been a flat quarter. One sector which has been particularly disappointing has been retail, which started the year as one of the most widely favored groups in the whole index. Thus far the Retail Index has fallen over 5.5% in the quarter, while the Utilities Index is the best performing so far in 2014 ,up 6.8%, after it was expected to be one of the worst performers in 2014.
However, its defensive nature and small size make it a very unlikely candidate for market leadership. Its interest rate sensitivity counts against it as any move in interest rates can quickly change this positive return into a negative one. But this is not true of the second best performing group which is the bank index, which has also returned 6.8% in the quarter. This group would actually benefit from rising short term interest rates, since these would help expand lending margins.
Fortunately, we haven’t suffered any deep declines in the broad indices, although on a sector by sector basis the returns have been very wide for what has been a flat quarter. One sector which has been particularly disappointing has been retail, which started the year as one of the most widely favored groups in the whole index. Thus far the Retail Index has fallen over 5.5% in the quarter, while the Utilities Index is the best performing so far in 2014 ,up 6.8%, after it was expected to be one of the worst performers in 2014.
However, its defensive nature and small size make it a very unlikely candidate for market leadership. Its interest rate sensitivity counts against it as any move in interest rates can quickly change this positive return into a negative one. But this is not true of the second best performing group which is the bank index, which has also returned 6.8% in the quarter. This group would actually benefit from rising short term interest rates, since these would help expand lending margins.
Healthcare
and technology sectors also performed well during the quarter, up until the
last few weeks when the sectors have given back most of their first quarter
gains, as investors rotate sectors.
The start
of the second quarter will bring about the beginning of earnings season. The actual earnings results from companies
during the first quarter should tell us a great deal about where markets and certain
sectors could be headed as we head into summer.
Buckle up, we could be in for a bumpy ride.
