The NCAA basketball tournament starts Tuesday, which gives Jeffrey Kleintop, chief market strategist for LPL Financial (LPLA), a good reason to outline the “sweet sixteen” factors he sees driving today’s stock markets.
The third month of the year can be a downer, Kleintop says in a report issued Tuesday.
“In three of the past four years, the S&P 500 raced higher in March only to reverse all of those gains in a pullback of about 10% that began in late March or April,” the expert said. “It later took stocks at least five months to climb back to the peaks of March.”
Kleintop says the four brackets, or regions, of market-moving factors concern the economy, policy, fundamentals and sentiment.
When it comes to the U.S. economy, there is debate over growth and whether or not it’s being stunted by extreme winter weather. Data set to be released in the next few weeks will show if there has been a “genuine softening” of economic activity or not.
As for the global economy, Kleintop points to shifts in China, as well as in Germany and Japan. Could weakness in one of these large powers be overshadowed by growth in the other nations? Global policy issues today concern tensions in Ukraine, of course, as well as in the developing economies. In past years, conflicts overseas “did not keep stocks from moving on once the prospects for a broader military engagement faded,” he says.
However, if unrest prompts further Russian action, the risk of a broader crisis “rises.”
Tapering has prompted some emerging markets to devalue their currencies and trim spending. “These consequences of tapering have created weakness in emerging markets that has spilled over into developed economy stock markets,” Kleintop said.
Fundamental issues affecting the markets include earnings growth for S&P 500 companies, which are accelerating from their “sluggish, low single-digit growth” of 2013, according to the LPL Financial analyst.
Still, the price-to-earnings ratio of the S&P 500 for the past four quarters is now just about one point below the 17–18 PE level “seen at the end of all prior bull markets since World War II,” he points out.
As for stock sectors, cyclical groups like consumer discretionary and industrials ticked up more than 40%. But this year, defensive groups such as health care and utilities have been the better performers.
“A return to cyclical leadership would be a sign of strength for the stock market,” noted Kleintop in his analysis.
When he looks at market sentiment, the strategist can’t ignore soaring margin debt. “However, margin debt and the S&P 500 have tended to move together, historically, as the stock market’s rise to all-time highs [has] lifted margin balances and stock weightings,” Kleintop explained.
In addition, investors have been more and more interested in U.S. stocks, and they could be “spooked out of additional buying by rising volatility,” he points out.
The markets give investors and advisors a lot to keep up with—just as the NCAA tournament does for sports fans. The key message for investors considering these factors, Kleintop says, is: “Do not be too confident in any particular outcome. It is a time to nibble at opportunities as they emerge; it is not a time to jump in with both feet, or for indiscriminate selling.”
In his opinion, investing is no game, and forecasting is no science.