Stock Market Slowdown: Soft Data, Earnings Signaling Bull Market End?

Stock market bull and bearA lot of economic news has been coming in softer of late and it’s affecting the stock market. That is to say that the data are often just slightly below existing Wall Street consensus.

Stocks have been churning all year and the market’s lack of direction is a result of all the usual suspects: the Federal Reserve, oil prices, global economic news, and geopolitical events.

Now that we’re on the cusp of first-quarter earnings season, the stock market may welcome the distraction. However, we certainly can’t expect much, based on the data we’ve been seeing lately.

Federal Reserve and Stock Market Uncertainty

I’ve always found that corporate financial reporting is the best guide for investors, but the stock market always trades off central bank intervention. This is the big uncertainty this year.

Last year, stock market sentiment was positively affected by the expectation that the Federal Reserve would begin increasing rates. The idea was that the central bank would only begin the upcycle in interest rates if the economic news was sustainably strong enough. Currently, it’s guesswork as to when the Federal Reserve will increase rates, even though their recent language was considered to be slightly more hawkish.

While monetary policy changes are the great arbiter of share prices in the near-term, the stock market is still a system of discounting sales and earnings. This market knows that the central bank is one step closer to raising rates. For corporations, a few rate hikes would still constitute a low-capital-cost environment.

Other Factors Slowing the Stock Market

It’s going to continue to be a tough year for equities due to global growth concerns and the stronger U.S. dollar. But looking where the stock market has come from, a down year (or two) in equity prices would not be unreasonable.

In a slow-growth environment with mediocre economic news on a global basis, dividend income is all the more important. In addition, after having had some very exceptional capital gains from the broader market and an earnings environment that’s softening, individual stock selection is the key to outperformance.

It will be very interesting to see what blue chips report in their first quarter. Quite a number of large U.S. corporations operating in Europe noted a pickup in business conditions in the fourth quarter of 2014.

Any Bright Spots in This Slow Market?

With the solid expectation that financial results are going to be weak in the energy patch (see “Oil Price Weakness: 5 Stock Market Picks to Watch for Value”), the key sector this quarter I believe is technology.

Technology leadership in terms of sales and earnings growth is a top requirement for the broader market to advance.

Transportation stocks have had their heyday, which is a traditional price trend in the early stages of a secular bull market. But what this stock market needs, if it’s going to move higher in the face of higher interest rates, low oil prices, and flat conditions abroad, is earnings growth from large-cap technology.

Year-to-date, the NASDAQ Composite has been outperforming other large-cap indices and trading similarly to the Russell 2000.

This stock market is maturing from its 2013 breakout, but I don’t believe the secular bull market is over. And that’s with soft economic news and the prospect of rising rates in the not-too-distant future.