Spring Letter to Clients {Part I}

We recently sent to our clients this letter with our market thoughts.  I will be publishing it in parts over this week and will finish up next Monday.

Market Update

The stock market is little changed five months into 2014.  Yet that apparent calm masks considerable damage that’s been done to some of the more highflying sectors since March.  Here are a few examples.  At one point the Nasdaq was down as much as -8%, Biotechnology was down -21%, Internet -15% and healthcare -8%.  Many of these once high-flying sectors have seen some recovery but they are still well off their most recent highs.  The pattern since 2009 has been for markets to post often-impressive gains in the winter and early spring months. We have not seen that pattern emerge so far this year.  We would note though the S&P 500 gained over 11% last September through December.  We think the advance in those last four months may have stolen some of this year’s gains. That move last fall by the way is roughly equal to or better than market gains for the entire years of 2004, 2005, 2007, and 2010-12.   

The market’s churning performance forms a backdrop to a fierce debate within the investment community regarding stock's future direction.  Basically there is one side that sees the market as topping out and primed for a major decline.  The other camp argues that equities are poised to begin a new secular bull market.

The bearish camp uses charts* like the one pictured above to make their argument.  This side thinks markets are mimicking the same pattern we’ve seen since the late 90s.  Here, so it goes, stocks are forming a topping pattern after a wildly successful run from 2009’s trough.   Investors subscribing to this view believe a serious correction could eventually develop.  They argue that such a decline could mimic the last two market cycles when stocks tumbled between 30-50%. This bearish argument cites high valuation and points to potential bubbles in high momentum stock in sectors such as the afore mentioned biotech or Internet spaces.

Part II tomorrow.

*"JP Morgan Guide to the Markets 2Q|2014", March 31,2014:  Charts are compiled by JP Morgan Asset Management and are an excellent quarterly view of different asset classes.  You can access the series here