Apr 1 2014, 1:58pm CDT | by Forbes
After barely eking out wins for the first quarter of the year – the Dow finished with an 0.7% gain, the S&P a 1.2% return and the Nasdaq an 0.6% win – the equity markets are already off to a better start for 2014’s second quarter. Not only did the S&P hit a new high Tuesday morning, but some market insiders are predicting that the frostbite that descended upon U.S. stocks in the first quarter will thaw, allowing the bull market to continue its run.
The Institute for Supply Management said Tuesday that its index of manufacturing activity increased for the second month in a row, up to 53.7 in March from 53.2 in February. While this was below the consensus estimate of 54, figures above 50 indicate that manufacturing is growing – in other words, good news for the economy. And on this good news the S&P rose to a new intraday high of 1,884.60, and the Dow came within 30 points of its all-time intraday high. Though the indices moved off their highs as the morning wore on, all three are still solidly in the green, with the S&P UP 0.5%, the Dow up 0.36% and the Nasdaq enjoying a 1.16% gain.
Following 2013’s record-setting performance, the tepid stock growth in 2014’s first quarter – not to mention, dreadful winter weather that weighed on everything from auto sales to energy sector earnings – led some to look at the bull market’s fifth birthday and question when, not if, the run will come to an end, and whether the fall would start with a pop in the sectors that did manage to see 2013-like growth, like healthcare. “What’s interesting if you look back in time is that normally we have five year periods like this every 7 years, [and] when they coincide with a 14 year innovation cycle we end up with speculative bubble tops,” Mark Yusko, CIO of Morgan Creek Capital Management told Forbes’ Sam Sharf last month.
Jeffrey Kleintop, chief market strategist for LPL Financial, recently acknowledged some investors do fear that “a bubble in stock market valuation is again developing as investors become overly optimistic.” However, he noted, when the bull market popped in 2000, 70% of the S&P 500 industries’ total market value had price-to-earnings ratios over 30, a level that could be called “bubbly.” Today, less than 4% of the industries comprising the S&P’s market value have P/E ratios above 30.
“Looking at valuations, compared to 14 years ago, the party in the stock market may not be just getting started — but it is not yet close to being over,” Kleintop concluded.
Schaeffer’s Investment Research agrees, and recently concluded that not only is the party poised to continue, it could really rage in April in particular. “In fact, April is the top-performing month of the year over the past 40 years, going by average return,” the research firm said. “May has averaged a return of 0.67%, ranking seventh out of the 12 months, and then June is even weaker, having averaged a return of 0.39% (ranking eighth).” April, by comparison, has averaged a 1.66% comparison over the past 40 years.
Despite this trend, Tim Edwards, director of index investment strategy at S&P Dow Jones Indices, says there are several events occurring in April that investors should have their eye on, including the NATO foreign minister’s conference in Brussels, Afghanistan elections on April 5 and Indian elections on April 7. All of these events have the potential to impact the market’s performance — and given the volatility that has occurred in emerging markets thus far, impact the markets for the worse.
Likewise, Morningstar analyst Lauren Adams cautions investors from getting too greedy in this environment. “In general, we think investors should pull back on risk when enthusiasm is running high and the market’s valuation is relatively rich,” she said in a recent note. “We think the pendulum is swinging closer to the side of greed at the moment.”
Rather than buying into an already-hot sector, Adams says that investor concerns about stability in emerging markets is actually a buying opportunity for certain consumer staples stocks that are higher quality and could sustain good value despite hits from the emerging markets. “firms such as Unilever and Coca-Cola are well-positioned to capture rapidly growing demand for branded consumer products in these markets over the long run,” she says. Coca-Cola is down 0.5% for the day and down 4.9% for the year so far; in 2013 the stock posted a near-10% return. Unilever, meanwhile, is down 0.06% for the day but up 4.2% for the year; in 2013 the consumer products company gained just 4.4%.
Other good defensive moves for the second quarter and beyond, Adams added, can be found in the energy sector, which she categorized as Morningstar’s most undervalued,”with a median discount of 3% to intrinsic value for the sector.” Among the names she likes there are three oil and gas companies: Ultra Petroleum, Devon Energy and Denbury Resources. Ultra is up 24% year-to-date, Devon is up 9.4% and Denbury is up just 0.5% for the year.
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Source: Forbes Business
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