It’s just the same old story with stocks. One day they’re up; the next day they’re not.
If 2013 was a breakout year from the previous long-run recovery cycle, 2014 is a year of choppiness.
Stocks just can’t seem to latch onto any particular trend. A convolution of influences from earnings results to geopolitical events continue to beat down what positive sentiment sprouts from the data.
It’s no surprise to have choppy capital markets after such a strong year of capital gains. And that’s the thing I always try to keep in the back of my mind: stocks are about the future—a future stream of earnings discounted for every potential eventuality at prevailing rates of interest.
With downside leadership in equities provided by the high-valuation large-cap technology stocks, it’s difficult to imagine the main market indices accelerating near-term, especially as the marketplace has already voted on this earnings season.
A familiar mantra coming from a lot of Wall Street analysts is that the pace of U.S. economic activity should accelerate towards the end of the year. Several firms are calling for stronger oil prices and lower gold prices accordingly.
But if the choppy action in stocks so far this year is any guide, things are unlikely to unfold as expected. And the catalyst for downside is unlikely to be due to corporate performance or the Federal Reserve. Companies are expecting to meet existing guidance, and the central bank continues to provide a stable low interest rate environment.
Geopolitical events unfolding between Russia and Ukraine are a growing risk for investors. A “sell in May and go away” type of scenario is already in the cards for stocks, but this simmering conflict has the potential to seriously harm investor sentiment (among other things).
Portfolio safety is a top concern right now, and it’s why stocks like Microsoft Corporation (MSFT) and Oracle Corporation (ORCL) have turned higher recently, while others like Amazon.com, Inc. (AMZN) and Netflix, Inc. (NFLX) are breaking down.
More speculative fervor is coming out of this market right now. It started with biotechnology stocks and initial public offerings (IPOs), and is migrating to the astronomically valued technology stocks. Investor sentiment is changing right now.
So it’s very important to have bedrock portfolio positions in solid, dividend paying stocks in a slow-growth, elevated-risk environment. As the marketplace is proving again, it’s aversion to risk and uncertainty is pushing money into the safest names.
Stocks like Johnson & Johnson (JNJ), 3M Company (MMM), Union Pacific Corporation (UNP), and Colgate-Palmolive Company (CL), to name a few, are likely to keep pushing their highs because institutional investors want the safety of their earnings and dividends. (See “Why Economic Growth Doesn’t Guarantee Rising Share Prices.”)
A reduction in speculative fervor is actually a healthy development for the longer-run trend, but not with geopolitical events as the catalyst.
It’s been choppy action all year, and the market’s jitteriness isn’t going away. A full review of portfolio risk is worthwhile right now. This is a market that could easily come apart, not on corporate fundamentals, but on geopolitical events.