HFG Perspective: June

June 2, 2014

While the market hasn’t produced much in the way of gains so far in 2014, the month of May ushered in new all-time highs for the S&P 500. Sell in May, and go away? We don’t think so.

Earnings growth is not robust. Nor is economic growth. In fact, we just saw our first negative quarter of GDP since 2011. At the same time, the broad economic and corporate metrics we track continue to get better, not worse.

While we don’t want to overhype the all-time highs in the market, they aren’t meaningless. They rarely occur when things are deteriorating.

Further, the fact that the market isn’t rallying aggressively like it did in 2013 should not be cause for disappointment. The fact that the market has been able to hold those gains is nothing to ignore. In our minds, it is a sign of strength, not weakness.

While the broad market gains in 2014 have been relatively meager, under the surface, quite a bit is happening. Many of the high-flying and speculative sectors in 2013 (e.g., biotech, internet, etc.) have sold off heavily so far this year, while the more profitable and stable large caps have regained their place as leaders.

Again, we think this is healthy. From a psychological perspective, confidence in basic businesses translates into confidence in the broad economy and corporate landscape. When there is a void in confidence in more traditional companies, many investors tend to seek the extremes. In this case, one extreme could be safety (e.g., cash or bonds) while the other extreme could be speculation (e.g., biotech and internet stocks). Back to basics, as we see it, works just fine.



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