Last month’s Searching for Alpha commentary detailed our view that stocks would likely come under pressure in the next quarter. While equities didn’t exactly fall out of bed in April, there was an update in volatility. There are several reasons why I think we’ll continue to see pressure in the markets.
First off, stocks appear priced for perfection. Among the positive earnings, there are still significant issues in the world economy, with Europe on the top of that list. Last Friday’s weaker than expected GDP, and continued uncertainty about the direction of interest rates—as illustrated by the considerable volatility in 30-year bond prices—underscores an environment that will be difficult to map, at least in the short term.
It would not be wise to underestimate market seasonality. With elections in the U.S., Greece and France looming, rising energy prices and the domestic housing market trying to decide whether to bottom or keep falling, there should be enough uncertainty to keep a lid on stock prices.
How should advisors play this weakness? As I mentioned last month, rebalancing into the weakened market is a smart strategy. Those who are sitting on outsized gains from individual security plays may want to raise cash in anticipation of better times later in the late summer.