CI Outlook - Archives

May 2014

As we look back at the month of April we see a market that is holding near its highs after unexpectedly falling sharply and then recovering.  What happened?  Earnings season was about as expected.   Janet Yellen gave us a scare but then recovered her composure.  Maybe it was the trouble in Eastern Europe or a shockingly slow domestic economic growth rate.  There was even fear over a continuing flight to safety as rates continued to drop on Treasury securities.  So why did the major markets recover?  Why are they not falling precipitously?  Should we “sell in May and go away”?  At this time we do not think so.

Although the potential for further upheaval in the Ukraine is difficult to predict we feel the US economy is somewhat insulated from the turmoil at this time.  In fact our markets seem to be the safe haven for foreign investors.  We believe that is the reason for recent strength in both US stock and bond markets.  The flight of capital to US shores is showing up in a newly restored overseas bid during Treasury auctions.  And we think that money is responsible for the continuing demand for large capitalization US stocks.  But the strength in large stock indices is not trickling down to indices representing smaller companies.  And this might be a sign of trouble.

Although the S&P500 index is near its recent high, the S&P mid and small cap indices are well below theirs.  Normally this represents a preference by investors for the relative safety of larger less volatile stocks.  It is usually viewed as a sign of maturity and the beginning of the end for cyclical bull markets.  While we feel this fear of the bear is partly to blame for the current divergence between large and small cap stocks, we think investment interest by foreigners, seeking the relative safety of our shores, is contributing to the current extreme difference in relative performance.  Because it would be foolish to ignore the growing selectivity in the markets we have reduced exposure to underperforming small caps by liquidating ETF’s whose primary holdings are domestic small cap stocks.  At this time we continue to hold the Wisdom Tree European Small cap fund.  We still believe Mr. Draghi and the ECB will do what is necessary to prop up Europe and the Euro.  So while we are concerned about trouble in the Ukraine spreading into Europe we continue to hold DFE, but have a tight stop on it.

We have sold the small cap ETF and under preforming stocks, such as Sandridge Trust, but we do not feel it necessary to “sell in May and go away”.  While the first quarter GDP grew at a stunningly low 0.1% we view that as an aberration.  In our opinion economic growth is picking up.  While we believe 2014 will be a slow growth year we do not think it will be a recession year.  Our opinion was strengthened during recent earnings announcements.  In their earnings calls many companies spoke of firming order books and other signs of strength as they offered guidance for the rest of the year.  That type of confidence along with cheap money and cheap energy is keeping us positive on the markets for the rest of the year.  So while we may be slow to reinvest sales proceeds it will be due more to lack of opportunity than fear of the markets.

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