If one looks at equity returns so far in 2014 compared to 2013, it is clear the “Polar Vortex” hasn’t only been affecting the weather. Specifically, for the period 12/31/2013 – 4/17/2014, the S&P 500 had a total return of 1.49 percent (5.17 percent on an annualized basis). For the same period last year, 12/31/2012 – 4/17/2013, the S&P 500 had a total return of 9.48 percent (36.22 percent on an annualized basis and it finished with a total return of 32.38 percent for 2013). In addition, at this point last year, the S&P 500 was in the midst of its first 3 percent-or-greater pullback, and this year we have already experienced two greater-than-3 percent pullbacks. Despite this very disparate market action year-over-year, we still believe the bull market is intact and that the S&P 500 can post a modest double-digit total return for calendar year 2014. We believe solid global growth, which could continue to translate into strong corporate earnings, will provide a floor for equity indices in the near term and the basis to move to new highs as 2014 plays out.
We have been talking for quite some time about the themes of improving housing and vehicle markets in the United States as well as the United States’ push toward energy independence as being strong positive influences for the nation as well as the global economies, and we believe this is still the case. Last month, we saw total vehicle sales hit 16.33 million units (on an annualized basis), which is the highest level in almost seven years. We also saw both the ISM Manufacturing and Non-Manufacturing Indices tick back up last month and we show that job openings are at a six-year high. Coupled with the anecdotal hiring data in the oil patch and across college campuses country-wide, this leads us to deduce that there is enough propellant in place to provide even more growth for the United States as well as global economies going forward.
There are always multiple risks when investing and clearly the situation in the Ukraine and the flattening of the yield curve are worthy of real concern. However, we believe the positives still outweigh the negatives and for us the proof continues to be in corporate earnings, which have been much aligned and under-appreciated during the bull market. We are very early into this earnings season, (only 12 percent of the S&P 500 has reported) but we show about 77 percent are coming in better than expected which is higher than the long-term average and also last quarter at this same point. In addition, we show earnings for the S&P 500 are expected to grow by 11.92 percent year-over-year which is higher than a quarter ago as well as a year ago. The bottom line is, we believe the bottom line (earnings) are still impressive enough to translate into solid returns for equities in 2014 and a continuation of the bull market, but our senses are clearly becoming more cognizant of some warning signs that this bull market is aging.
Mike Boyle is a senior vice president, asset management, at AAM and a CFA charter holder.