October 1st, 2014:
Ordinarily this column addresses the quarter just completed. This time, we need to extend beyond September because things really got interesting as we were preparing this report. O n September 18th, for the 34th time this year, the S&P 500 closed at a record high. Will 2014 witness a 35th record? The S&P entered 2014 on an epic run, having backed up a 16% gain in 2012 with a 32% gain in 2013. Through September 18th, the S&P was up nearly 9% for the year. Yet there were signs that all was not right in the stock world. As we have noted previously in these pages, we found reason for caution. The index’s gain had far outpaced economic growth. Key indicators suggested that perhaps the market had decoupled from reality. Q1 GDP was negative. Q2 GDP was robust, but possibly just a snap back phenomenon. Wage growth has stagnated. The consumer has been struggling. The labor participation rate continues to decline. Corporate earnings have too often failed to meet expectations. It has been our view that none of these indicators pointed in any way to Armageddon. After all, economic growth and corporate earnings have largely been positive. Just not as positive as the stock market’s response. We have maintained that economic fundamentals need time to catch up to the market. That can mean the market corrects, but it could also mean that the market simply pauses for a time. Perhaps the most telling sign of market confusion was that the S&P appeared to be marching to a different beat than other market indices. There is an old Wall Street adage that says to “sell in May and go away”. While the Dow, the Russell 2000 (small cap index), and the EAFE (global index) have basically gone nowhere since May, the S&P reached 26 record closes after May 1st. The chart below shows the S&P’s departure from other common market measurements.