Major Stock Indices Continue Sideways-Small Cap Stocks Correct

This Week’s Highlights:

1. The major stock indices continue in a sideways pattern with the Dow Jones Industrial Average down almost 1% so far in 2014 and the broader S&P 500 up just under 2% as of last Friday.  (Google Finance)
2. Small Company stocks measured by their appropriate index have moved into “correction” territory this year, while large company stock indices have held flat.
3. We continue to see “red flags” for the stock markets overall and expect interest rates to stay flat to down in the coming months.
4. Monday, May 26^th is Memorial Day and the financial markets are closed as well as our offices.

READ ON FOR MORE DETAILS……………………………………………………………………..

The Markets:

This week’s update will explore the recent divergence in large-capitalization stocks, represented by the S&P 500 Index, and smaller companies, represented by the Russell 2000 Index^®6 and the Russell 2000 Growth Index^®7.

Many of the high-flying Internet and social media stocks have been hit hard since early March, and the same-holds true for some of the more speculative biotechnology firms (StockCharts, various sources).

But look at Figure 1. While the S&P 500 Index has held up fairly well, the more aggressive smaller-company stocks have begun to correct.

Not surprisingly, the small-cap growth issues have been hit a bit harder and are down 12.7% from the March 4^th peak to the May 8^th trough. The Russell 2000 Index has shed nearly 10% from its peak to its recent bottom.

The Treasury market’s 2014 rally might suggest we’re in for a period of economic weakness (Treasury bonds historically perform well when economic data are weaker than expected), but a number of indicators have held up well.

Is a broader sell-off in the works?

Baseball legend Casey Stengel was once quoted as saying, “Never make predictions, especially about the future.” Simply put, there are too many unknown variables at play.  So far, most selling has been contained to small-company stocks and the high flying “growth” stocks of last year, but there are several “red flags” that could be indicating the stock market is in some type of topping phase.

Our Outlook:

We continue to look for interest rates to remain flat to down in the coming months.  The yield on the 10 year U.S. Treasury is now around 2.54% after reaching the 3% level at the end of 2013. (Bloomberg)  Our portfolios have continued to benefit from the drop in interest rates so far this year as well as the increase in our “alternative” assets.  Our stock models continue to focus on individual companies that meet specific screening criteria, and this has served us well so far in 2014.  We would expect the stock markets in general to either continue to move basically sideways for the foreseeable future, or start some type of downturn.  For this reason, we remain underweighted in our stock/equity positions for all risk levels.  We will keep you posted as to any changes moving forward.

Holiday weekend

The Memorial Day weekend is almost upon us. The bond market will close at 2 p.m. ET this Friday, and the stock and bond markets will be closed on Monday May 26^th.  Our offices will be closed as well.  While we all spend time with family and friends, please take time to honor our fallen heroes who have paid the ultimate price for the freedoms we enjoy.

God Bless,

Your TEAM at F.I.G. Financial Advisory Services, Inc.

 

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¹ The Dow Jones Industrials Average is an unmanaged index of 30 major companies which cannot be invested into directly.  Past performance does not guarantee future results.

² The NASDAQ Composite is an unmanaged index of companies which cannot be invested into directly.  Past performance does not guarantee future results.

³ The S&P 500 Index is an unmanaged index of 500 larger companies which cannot be invested into directly.  Past performance does not guarantee future results.

⁷ The Russell 2000 Growth Index® is an unmanaged index that measures the performance of the small-cap growth segment of the U.S. equity universe. It includes those Russell 2000 companies with higher price-to-value ratios and higher forecasted growth values. The Russell 2000 Growth Index is completely reconstituted annually to ensure larger stocks do not distort the performance and characteristics of the true small-cap opportunity set and that the represented companies continue to reflect growth characteristics. The index cannot be invested into directly. Past performance does not guarantee future results.