Daily Gains Letter

Historical Trends, Global Economic Factors Say Stock Market at Risk

By for Daily Gains Letter |

Stock Market RiskWhat if I told you the best six months for investing in the stock market are drawing to an end? Not good news, is it?

As we enter the second quarter, there is optimism based on the price action of the stock market in 2014. Yet as I mentioned, what is historically recognized as the best six-month period during the year for investing in the stock market, particularly the S&P 500 and Dow Jones Industrial Average, according to the Stock Trader’s Almanac, is coming to a close at the end of April. With the S&P 500 having returned only 0.44% in 2015 (better than the 0.26% decline in the Dow Jones Industrial Average), can we really expect much for the stock market following what was supposedly the historically high period for stock market investing this year?

Stock Market Exceptions

The stars in the stock market so far this year have been the higher-beta stocks, as traders and investors search for potential higher gains. The NASDAQ and Russell 2000 advanced 3.48% and 3.99%, respectively, in the first quarter.

Small-caps were tops in March with the only positive move. The Russell 2000 edged up 1.57% versus a 1.74% decline for the S&P 500.

But while the historical pattern for the stock market doesn’t always play out, as was the case in 2013, the odds are in its favor.

Retracing back to April 2014, the DOW and S&P 500 pushed upward, while the higher-beta NASDAQ and Russell 2000 fell 2.01% and 3.94%, respectively. Yet there was negative sentiment towards higher-beta stocks in the stock market that, so far, hasn’t been the case this year. Of course, it could easily reverse going forward, especially if the overall stock market risk increases and helps to drive selling in higher-beta stocks.

Whatever the case, April could bring added uncertainties. Wednesday marks the start of the first-quarter earnings reporting season, with Alcoa Inc. (NYSE/AA) beginning the earnings parade for the S&P 500 companies.

Know that the first quarter could be quite soft. Recently, I talked about the negative earnings growth projected for the first quarter by FactSet. I also highlighted the likely negative impact of the strong dollar on the revenues and earnings of multinationals.

Global Factors Signal Stock Market Risk Ahead

Plus, globally, we have the stalling in China and the country’s moves to inject more stimuli into the economy. Based on past discrepancies, things could be far worse than we’ve been told for the Chinese economy. The pressures on exports from slackened global demand and lower imports suggest things are hurting, too. While we do not know what the real situation is behind the Great Wall, it cannot be good.

Then you have the continued thumbs-down from the Kremlin, where President Putin continues to mess around with the global community. The World Bank just came out with a report that estimates the Russian economy could decline by 3.8% this year and 0.3% in 2016 should the situation remain status quo. The real concern is the impact this could have on the eurozone’s fragile economic recovery, where we are finally beginning to see some promise.

A prudent strategy for investors would be to take some profits after rallies and buy on major dips in the stock market. We could see a similar pattern like 2014. The key for stock market investing this year is patience.

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