Since the beginning of the year, Health Care, Staples and Utilities have outperformed the overall market

The US stock market has been on a tear in 2013 with the first quarter showing advances worthy of an entire year (average annual returns are 9-10%.)  For the oft-cited overall indices, the year-to-date gains (not including dividends) through April 11th are shown below:

Dow Jones Industrial Average: up +13.4%

Standard & Poor’s 500:  up +11.7%

Nasdaq Composite: up +9.3%

Russell 2000: up +11.5%

Source: Wall Street Journal

With such healthy returns, is it full steam ahead? Or time for the market to take a breather?

Here’s the good news

As noted in my November post, “With consumers becoming more confident, is it time for a positive feedback loop?” , increased net worth from appreciating real estate and improved employment should drive spending, economic growth and stock market advances.  In the last six months we have seen:

  • House prices rebounding to a post-recession high (See latest Case-Shiller) for March 26th.
  • Improving employment numbers.
  • Increased economic activity as measured by gross domestic product along with positive leading economic indicators.
  • More retail investors gaining the confidence to invest again in stocks.  (See Mom and Pop Run with the Bulls)
  • Safe haven investments, such as gold, languishing. (See recent NYTimes article on gold)
  • Stronger than expected corporate earnings.

Is it time for the market to take a breather?

Given this positive backdrop, what are the risks of repeating the “Sell in May and go away” pattern? The last several years, in particular, have seen the stock market advance in the early part of the year through May, and then retreat during the summer months.  While this year’s US economy is stronger than the last few years, what are some upcoming data that bears watching?

This year I am focusing on the following concerns:

  • First, as of April, we are entering the earnings season when companies report profits.  Will companies surprise to the upside despite muted expectations?
  • Also, the defensive sectors, such as health care, staples and utilities are leading the market advance instead of those sectors that usually perform during bullish periods such as materials, technology, industrials.  [Refer to chart of sector performance year to date.] Such market action may be a flashing yellow light indicating “Caution ahead.”
  • Volatility, as measured by the VIX  is at a historically low range around 12-14 (normal ranges are in high teens to low 20’s).  Are investors becoming too confident given the recent robust advance?
  • The US debt ceiling needs to be increased and lawmakers are sharply divided as to how to proceed.  A stalemate – if similar to summer 2011 – could cause the market to retrench.
  • The macro environment has been quiet lately but economies in Europe and Asia are still struggling.

Take the long view

While the market may retreat in the short term, it’s important for investors to keep a long view.  Historically over long periods, stocks have appreciated more than bonds or cash.  And for building a diversified portfolio, stocks are an important component.  TheHuffmanBroadsheet.com will keep you apprised of trends in the markets.