As we look back at the month of April, I see a market that is holding near its highs after unexpectedly falling sharply and then recovering.
What happened? Earnings season was about as expected. Federal Reserve Chairman 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 I do not think so. Here’s why:
Although the potential for further upheaval in the Ukraine is difficult to predict, I feel the U.S. economy is somewhat insulated from the turmoil at this time. In my opinion, the U.S. markets are viewed as a safe haven for foreign investors and that’s the reason for recent strength in both US stock and bond markets.
The flight of capital to U.S. shores is showing up in a newly restored overseas bid during Treasury auctions. And I think that money is responsible for the continuing demand for large capitalization U.S .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&P 500 Index (SPX) is near its recent high, the S&P mid- and small-cap indices are well below their highs. 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 I feel this fear of the bear is partly to blame for the current divergence between large and small cap stocks, I think investment interest by foreigners, seeking the relative safety of our shores, is contributing to the current difference in relative performance.
Because it would be foolish to ignore the growing selectivity in the markets, I have reduced exposure to underperforming small caps by liquidating ETFs whose primary holdings are domestic small cap stocks.
At this time, I continue to hold the Wisdom Tree European Small Cap ETF (DFE). I still believe European Central Bank President Mario Draghi will do what is necessary to prop up Europe and the Euro. So while I am concerned about trouble in the Ukraine spreading into Europe, I continue to hold DFE, but I will consider selling it.I have sold Coffee Holding Company (JVA), but I do not feel it necessary to “sell in May and go away.”
While the first quarter GDP grew at a stunningly low 0.1%, I view that as an aberration. In my opinion, economic growth is picking up. While I believe 2014 will be a slow growth year, I don’t think it will be a recession year.
My 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 I may be slow to reinvest sales proceeds it will be due more to lack of opportunity than fear of the markets.
DISCLAIMER: The investments discussed are held in client accounts as of April 30, 2013. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable. Past performance is no guarantee of future results.
