Why a Soft First Quarter Offers Hope

By George Leong for Daily Gains Letter | Apr 3, 2014

The first quarter, by all accounts, was a dud, especially if you were invested in blue chip stocks as the Dow Jones Industrial Average retracted 0.74% in the quarter.

Yet March also saw some shifting of capital from higher-risk assets into blue chips and large-cap stocks, as the NASDAQ and Russell 2000 underperformed with declines of 2.53% and 0.83%, respectively.

But the muted gains in the first quarter do offer some hope heading forward, especially if the stock market can attract some leadership and if the economic outlook and jobs numbers can improve. For instance, the S&P 500 led the way in the first quarter with a 1.32% advance (or a 5.28% advance on an annualized basis). By comparison, in 2013, the index had already surpassed this level of advance by March.

Given the muted results to date, we could see much better gains in the quarters ahead, but much will depend on several variables that currently cast a cloud over the stock market.

First, the Fed is continuing to cut its quantitative easing and the consensus is that the bond purchases will dwindle to zero by year-end. While this is discounted by the stock market, traders are more concerned about when the Federal Reserve will begin to increase interest rates. The early thoughts are for rates to rise sometime in the first half of 2015.

Yet Fed chairwoman Janet Yellen gave the stock market a lift on Monday after suggesting the central bank would do whatever is necessary to make sure the economic renewal and jobs growth continue unabated. Now, this could imply that the bond buying could continue … Read More