It has been a wild ride for some equity investors over the last few weeks. While the broad S&P 500 Index continues to hover around its early 2014 level, underneath the surface a dramatic shift has occurred.
The high-flying growth stocks that powered much of 2013's 32% rally are enduring sharp losses, while the laggards of last year are moving higher. This trend began in early March, and has continued unabated through mid-April. Along the way, market darlings, such as Tesla (down 25%), Twitter (down 44%), Biogen Idec (down 22%), and Netflix (down 28%), have been crushed; although they are all still up significantly from a year ago. Th e damage has been largely confined to the two hottest areas of the market: biotechnology and internetrelated names. In contrast, an index of low-growth utility stocks is up more than 10% in 2014. What is the market's message from this rotation out of high-growth companies to the less flashy nerds of the investment universe?
To answer that question, one must put forth a reasonable explanation as to the cause of this trend. What is unusual about the market’s recent behavior is the lack of consensus around this question. The most commonly cited factors (weak first quarter earnings, escalation of the Russia-Ukraine crisis, the fear of higher interest rates from a stronger economy, or people raising cash for taxes) have been well understood for awhile now and seem less than satisfying.
Emerging market stocks, considered among the most volatile places to invest, have actually rallied sharply during the last few weeks. This disparity highlights the selective nature of this decline, and argues against a generalized fear about the economy that is causing investors to flee these names.
Indeed, the tone of U.S. economic data continues to reflect an improving trend. With the nasty winter weather now behind us, second quarter real GDP is likely to be north of 3% after a first quarter below 2%. Recent strength in retail sales seems to confi rm that the economic soft patch we recently experienced in the U.S. was largely weatherrelated. As a result, it is hard to identify a pattern in recent economic data that would justify a decline in stock prices.
In the long run, stock prices are fundamentally driven by earnings growth, which increases the value of an ownership stake in a company. In the short run, the fickle nature of human behavior is often what drives markets. It is sometimes said that the stock market has predicted "nine of the last four recessions," implying that investors are quick to exit when markets are falling, even when there is no fundamental reason for the decline. While unsatisfying, it may be the best explanation for the current malaise.
|Investment and Insurance Products:
• Are Not insured by the FDIC or any other federal government agency
• Are Not deposits of or guaranteed by a Bank or any Bank Affiliate
• May Lose Value
|The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. This presentation is not an offer to buy or sell, or a solicitation of any offer to buy or sell any of the securities mentioned herein.
Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results and are based primarily upon a hypothetical set of assumptions applied to certain historical financial information. Certain information has been provided by thirdparty sources and, although believed to be reliable, it has not been independently verified and its accuracy or completeness cannot be guaranteed.
Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as on the date of this document and are subject to change.
This material is available to advisory and sub-advised clients of City National Rochdale, LLC, a Registered Investment Advisor and a wholly-owned subsidiary of City National Bank.