Not only did the markets manage to close the month and quarter with a positive session but it also managed to put in its fifth straight winning week. Despite the ups and downs of the quarter, the S&P 500 (SPX) and NASDAQ 100 (NDX) both managed to post advances for the quarter. However, it was by many measures a frustrating quarter with growth taking a back seat to income. The first quarter was so bizarre that utility stocks were market leaders. The cost of the excessive wintry weather and Vladimir Putin’s shenanigans won’t fully be realized until first quarter earnings are announced later this month. However, on the back of an envelope, I project it likely cost about ½% to GDP and prohibited an expansion to the market’s earnings multiple.
Pent Up Consumer Demand
Looking ahead to the second quarter, we have several factors to consider when mapping out what to expect. To begin with, from the consumer’s perspective, I am expecting pent up demand for goods and services, which was delayed due to the weather, to manifest itself in the second quarter. Economic growth will continue to be slow and sloppy but nevertheless positive. Housing demand will likely get a kick start with spring weather and I expect a good selling season for both new and existing homes.
From a stock market perspective we have to consider the calendar and cyclicality of stock market flows. We have to recall that this is a mid-term election year. On average, during mid-term election years, the second quarter is a negative quarter. It is also the worst quarter of the sixteen quarter election cycle. April, in general, is the third best month for the stock market, after November and December. During mid-term election years, April is positive, on average, but ever so slightly.
It is clear from Janet Yellen’s commentary that the Federal Reserve will continue to support its cheap money policy for the economy. As a result, tapering fears, after a few rounds of tapering will no longer have any impact on the markets. Take that brick off of the Wall of Worry.
Yet to be taken off the Wall of Worry is the situation in Ukraine. I expect that will be resolved sometime in the second quarter.
Yesterday was the last day to sign up for insurance under the Affordable Health Care Plan. With that aside, we get into the political phase which will be the single most important issue underlying the midterm elections.
First Trading Days of Month Have Been Downers
We have to go back to November of last year to have a positive first trading day of the month for the SPX. The three first trading days of each month this year resulted in a cumulative decline of 70.80 index points on the SPX, or about 3.83% of the 2013 closing level. Taken in isolation, those three days caused considerable emotional damage to the stock markets in the first quarter. If we can turn in a positive or just a quiet first session of the month, it will go a long way to help the fragile psyche of the markets and in particular that of individual investors as we emerge from the winter.
Please continue to email me your queries related to the markets or economy at scott.rothbort.lakeview@gmail.com and I will compile the questions and answers for publication next week.
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Disclosure: At the time of this commentary Scott Rothbort, his family and/or clients of LakeView Asset Management, LLC had no positions in stocks mentioned — although positions can change at any time.
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