In April, corporate earnings in the United States, the Federal Reserve’s game plan, European elections and continued resistance to austerity measures in Europe dominated business news headlines. The consensus is that overall first-quarter results in the United States have been good, and most corporate executives see a positive outlook for the remainder of the year. In a few instances – where results have spectacularly outpaced estimates – Wall Street chastised companies for being overly cautious in their forecasting.
Despite a rally that pushed U.S. stocks up steadily 30 percent since October, many experts still see no clear-cut direction as to whether we are in a bull market or a short-term bull run in a bear market. Most anticipate modest gains at best from here on – and many suggest that investors look at small-cap stocks (with market values below $3 billion) that are less likely to have exposure to possible international economic downturns and global market fluctuations. That doesn’t mean that all blue chip companies should be avoided, though. Wall Street experts are suggesting that individual investors stick predominately with U.S. stocks, and are selective about purchasing commodities that could see prices fall if the economy in Europe falters.
On a bearish note, some experts point to an upswing in insider selling among Standard & Poor’s 500 companies – an increase that has boosted insider selling to its highest rate in 10 years. Perhaps this might be a trend worth noting. If corporate insiders are selling stock, it doesn’t inspire confidence in the company’s outlook despite a positive first quarter.
Perhaps it’s worth thinking about how the European elections might affect U.S. stocks. The biggest concern might be that the upcoming change of leadership in theNetherlandsand the possible changes in France and Greece could sabotage efforts made to address the Euro-zone debt crisis. Opposition to the austerity measures supported by Germany is growing. If the new leaders reverse course, Euro-zone nations would be back where they started. More stress on Euro-zone nations’ economies could increase borrowing costs, push some nations into recession and cause stock prices to fall. Despite this gloomy scenario, it is important to remember that economic improvements have made theUnited Statesbetter able to withstand weaknesses in the European markets.
At the end of April, U.S. policymakers were busy reviewing economic forecasts and determining future monetary policy. The Federal Reserve has kept interest rates at or near zero for four years in order to give businesses and consumers access to cheap credit. Ultra low rates have helped revitalize the stock market and enabled homeowners to refinance their homes and buy goods and services. Critics of the Fed policy believe these are short-term fixes that jumpstart the economy but do not address the real problems of burgeoning trade deficits and a tax code that needs a major overhaul.
Some economists are pushing for the Fed to start backing off the low-interest/quantitative easing policy because the economy is finding its feet. These critics believe that keeping Treasury bond prices high and government interest rates low means easy money, which in turn means elected officials continue to avoid tackling deficit issues and revising the tax code. Observers do not anticipate any major changes to the monetary policy until the Fed gets a clearer picture of the economy.
The bottom line: the economy and the stock market are in a much better position than they were a couple of years ago. After an impressive 30 percent run-up that began in October 2011, we are back where we were when opinions varied daily on whether the market forecast was bullish or bearish. Now, just as it was then, it’s smart to keep your expectations modest, refrain from knee-jerk responses and maintain an appropriately diversified portfolio.
The above is intended as general commentary only and is not a substitute for advice from professional tax and investment professionals.