by Brooke Thackray, AlphaMountain Investments
Market Update - March 2015
In the last few months we have seen the Dow Jones Index and the S&P 500 reach all-time highs and the Nasdaq trade above the 5000 level, fi nally after fi fteen years. Despite the new high levels reached, the market has not moved substantially higher since the end of October (the start of the six month favorable period for stocks). There is less than two months left before the favorable period for the stock market ends, time is running out to put in a strong performance.
Investors should not expect a lot more upside. The S&P 500 is struggling at and below 2,100 and needs a boost. At this time it is typically the expectation of positive earn
ings that fuels the stock market higher. Unfortunately, the outlook for Q1 earnings does not look strong. As of February 27th, there have been 89 negative EPS pre announcements versus 17 positive pre announcements for a ratio of 5.2 (N/P). This compares to the average ratio of 2.6 over the last ten years (Thomson Reuters). In addition, the forecasted earnings growth is currently at -3% for Q1 (Thomson Reuters). Negative forecasts do not necessarily translate into negative stock market performance. If companies produce positive surprises, the stock market will tend to move up.
Of course economic numbers can and do move the economy. Recently, the economic numbers coming in have been generally weak. The exception to this negative trend is Februaryās non-farm payroll report which came in at 295k, substantially above the expected 230k. Investors responded to this strong number (bullish report) by selling the market (bearish), fearing that the Federal Reserve schedule for raising interest rates was going to be advanced as a result.
Can we expect the EU or the Federal Reserve to move the market higher? Not likely. The Federal Reserve is trying to get the market warmed up to the idea of a rate hike in the future and the EU has just recently announced a quantitative easing program. It can hardly be expected that the EU will announce further stimulative action so fast. If anything, Europe could put a damper on the stock markets as the Troika continues to rattle swords with Greece over the conditions for monetary assistance.
I am not trying to build a bearish case for the stock market, but rather state that the upside potential is not astronomical at this point. Seasonal investors should still be invested, as April on average has been one of the strongest months of the year. From 1950 to 2014, April has been the third best month for the S&P 500, with an average gain of 1.5% and a track record of being positive 69% of the time. In addition, we are still in the six month favorable season for the stock market.
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