Since the beginning of 2014, stocks have done little more than move sideways. To date, the S&P 500 is up just 2.7%. Compared to the same time last year, stocks have underperformed by nearly 10%. Following a protracted and unusually harsh winter, second quarter earnings are clearly above-consensus, yet stocks haven’t benefitted. In addition to earnings, the recent blow-out jobs number also failed to move the market – in fact, stocks sold off and the rotation from offense to defense continued; utilities and consumer staples showed impressive gains during the last three months. Despite the sideways move in stocks, earnings growth and jobs growth signal improvements in the economy. The question is what will it take to make this market resume its familiar uptrend?
With more than a third of the year in the rear view, we have reached the proverbial “sell in May” axiom. Historically, June-September is dead money in the market. But last year, selling in May didn’t prove advantageous. In fact, the S&P 500 delivered a better than 6% return from May 1st through the end of September. With the recent slowing in housing and consumer credit, we aren’t anticipating a repeat performance. That brings us to the typical fall rally which could be challenged by mid-term elections. Given this backdrop, we are not ignoring the possibility of a flat year for stocks. Small Cap stocks are already down nearly 3% year to date and Nasdaq stocks are down close to 1%. However, a year of unchanged prices combined with rising business and economic activity could restore valuations without a major correction. This would affectively bring stock prices to more attractive levels and more in line with reasonable valuations.