Investors that remained in the market over the past four years have been rewarded. During the first quarter of 2013, the DJIA reached a level that has not been seen since the economic downturn and the S&P500 closed the quarter on a high not see since October 2007. All signs point to a positive environment; but is this irrational exuberance or are companies better positioned, financially?
The answer points to the latter as companies are flush with cash, bonds are reissued at historically low rates, and consumers continue to spend. As money has flowed into the stock market over the past two quarters, more conservative asset classes have seen better returns. Consumer Staples and Health Care have lead the way, while Information Technology and Financials have lagged. During this time frame Value has outperformed Growth. The search for yield has also been a running theme over the past six months as investors have substituted coupon payments for healthier dividends. Over the past couple weeks in April, we have seen a pull back in the market.
What should be interesting to watch is that large cap equities have been highly correlated to the benchmark making this asset class more efficient. This correlation could possibly be a natural causation because of increased analyst coverage within the large cap sector over the past couple of months/years. Midcap stocks have done well as these companies have less risk than small caps, and more inefficient than large cap stocks. Small cap has done well, but slightly trails Midcap. The US market has performed well in comparison to European and Asian economies. Uncertainty within foreign markets has created more investor-interest and preference in the US economy.
Within fixed income, the hunt for yield has become a drought. The historically low rates have depressed spreads within the fixed income market and forced investors to look outside of the US. The issue with searching outside the United States is that investors have to understand the political, sovereign, and country specific risk that are inherent within foreign bonds. Not to mention, the possible tax liabilities that can exist from interest payments.
There seems to be an acceptance that we could possibly see a repeat of 2012 over the next couple months where the best returns were seen in the first quarter and the remainder of the year was flat. As investors, this is the main reason why correctly timing the market is impossible. The summer time is usually a low volume period for the market. As an investor the best view would is to look at your personal circumstance and determine if you can either bear more risk or be more conservative.
