“The Stock Market” is a term that implies a single uniform investment forum that rises or falls as a cohesive index. In reality, especially in 2014 nothing could be farther from the truth.
The homogeneous “stock market” has fragmented itself down into several divergent personalities. If you own a portfolio, mutual fund or an index fund that tracks the S&P 500 you’re probably blase regarding 2014 performance. But if you’ve been investing in small stocks and not paying attention your account statement will tell another story.
Small stocks otherwise known as “Small Caps” have now given back all of their 2013 excess return over the S&P 500. The small cap stock market or proxy symbol “IWM” has been on a terrific performance streak since 2000 but as we have been saying since late 2013, the streak could be coming to an end.
As of May 21, 2015 the small cap market as depicted by the IWM has given back all of its excess return versus the S&P 500. In other words, unless you cashed out of small stocks when enthusiasm was rampant, you’ve given back all of your excess returns (Alpha).
So we really only get half credit for predicting severe market weakness commencing in the April/May period. The small cap market has crumbled as expected and based on my experience in bear markets I do not believe the weakness is over yet. Meanwhile the large cap based S&P 500 Index is defiantly stable and has yet to roll over.
Anticipating your question here: “Is there a past precedent for this market behavior?” There are only a couple of instances in the past 30 years and they happened near market peaks which were caused by tightening monetary policy which lead to recessions. At present we are no where near a new round of tight monetary policy, nor do we see a recession in sight.
Confusion right now would be justified. We shifted out of the majority of small caps by the end of March and have since redeployed approximately half our client assets into mid and large cap stocks. We prefer to remain just 50% invested which will allow us to hedge if need be.
Since the Fed has no interest in tightening credit and with no recession in sight its quite possible that the S&P 500 will emerge as the new leading market index. Not only that its just as possible that the S&P 500 just drifts sideways over the course of this Spring and Summer, its just too difficult to make a high probability call.