It was an interesting month for investors as we saw the first half of April act negatively, then reverse course in the second half. The NASDAQ Composite ended the month down 2% (recovering from a 5% intra-month drop) while the S&P 500 managed a slight gain. Russia and Ukraine took the spotlight for most of the month and seemed to dampen enthusiasm for equities. We saw money moving out of equities and into less volatile assets like bonds. Although bond investments experienced slight gains, most of our clients were flat for the month of April.
Although the situation in Ukraine is causing stress at the global level, domestic economic news continues to show promise. Employment figures were just released showing the unemployment rate has dropped from 6.7% to 6.3% last month. However, earlier in the month, GDP data issued by the Bureau of Economic Analysis showed the economy only grew at a 0.1% rate in the first quarter of 2014. These are somewhat conflicting pieces of data that may have helped keep stocks in a consolidation pattern ever since the S&P hit all-time highs at the end of 2013.
We believe that long term trends of the stock market are going to primarily follow the strength of corporate earnings. We see the market move on economic forecasts, global events, and natural catastrophes because we do not live in a vacuum. For example, the almost constant unrest in the Middle East can cause oil prices to fluctuate which affects the bottom line of many corporations. A hypothetical natural disaster in the Pacific Rim that causes a supply disruption slows down production and could translate into lost revenue for many American businesses. Currently, we have the Russia and Ukraine crisis. Although the Ukraine doesn’t hold much value to our economy, the potential impact of sanctions imposed on Russia could hurt an already fragile global economy. Therefore, we see the market temporarily take pause.
However, if we look closer at what corporate earnings have done in spite of the noise over the past year, the results are pretty impressive. We just survived one of the worst winters in recent history, and earnings were down slightly as a result. However, the trailing twelve months (TTM) chart still shows a positive slope and estimates for this coming year continue to show promise. The Dow Jones and S&P 500 indices may be near all-time highs, but that should be expected since earnings are also at all-time highs. What is really encouraging is to see that valuations are much lower than they were during the dot-com era and housing is more stable than what we saw before the financial crisis.
Assuming the geopolitical foray stays relatively in check, we believe that we have a foundation started for many years of prosperous markets. While we wait to see how the market behaves in May, let’s enjoy the change of seasons and be grateful that winter is behind us.
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