At the end of February the stock market once again established new highs, as measured by the S&P 500. The gains we experienced in February were just slightly greater than the losses that occurred in January.
Given the mixed performance of the market to start the year many investors are probably wondering, which way will the market go for the balance of the year. Some may think that January was a minor correction in what remains a very strong up cycle for the market. Others may surmise that stocks will struggle this year because we have had two strong years in a row.
I believe both scenarios are certainly possible this year. In addition we can certainly have aspects of both, where the market struggles at times, but will still establish new highs for the year.
Looking at economic data year to date, there really wasn’t that significant of a difference in what transpired in February versus January. Auto sales for both months were somewhat disappointing, but severe weather in much of the country certainly affected the results.
Probably the biggest factor impacting stocks in February versus January were investment flows. During January there were several weeks of significant outflows from mutual funds, while in February we saw the reverse with money coming into the market.
When we look at what may happen for the rest of the year, we must realize that expectations for stocks are reasonably high. Because the stock market is no longer inexpensive, companies must exceed expectations to move higher.
On the flip side, just because the stock market is at an all time high, it does not mean that the market is over valued. Corporate earnings in most years do move higher, so to the extent that profits increase stock gains should follow.
When we look at the current situation, we have stock prices and corporate earnings at record levels.
In addition profit margins are near all time highs. This implies that profits can still increase, if the economy expands. However, doubledigit earnings growth for this year does not appear to be likely.
Given this outlook, modest gains for the stock market for the balance of the year would be the most likely forecast. While the market may continue to set new highs throughout the year, most likely there will be some months it declines, keeping overall gains less versus the past two years.
As this column is being written on Monday, the market is down on the turmoil in the country of Ukraine. While I do not expect the events in Ukraine to have a lasting impact on stocks, these types of occurrences do remind us that owning stocks do carry some risk.
With the market rebounding in February after a weak January, essentially says that there was excessive pessimism in January. While economic growth may be somewhat disappointing for the first quarter of the year, in part due to weather, the economy should gain strength later in the year.
However, with the market at virtually all time highs, it is not realistic to expect large gains this year. In essence, unlike the last two years, where the vast majority of months were positive, this year will likely have more mixed results.
I think investors should not try to time the ups and downs that will likely occur this year. If someone has a higher than normal allocation to stocks, now might be a good time to reduce holdings when prices are relatively high. Otherwise, I believe investors should maintain their normal positions.
Allen Wisniewski has been involved in finance for more than two decades. He lives in Culver City with his family.
