Bull market intact after “good flat” first quarter, but changes afoot

In a three-month stretch of extreme winter weather, unexpected geopolitical unrest, a Federal Reserve chairmanship transition, and a continuing sluggish economy, investors should be happy with a 1% first-quarter gain by the S&P 500.
In essence, even without a lot of good news during the quarter, the financial markets proved resilient enough to keep general volatility low and fend off anything that looked like a threat to the bull market.
“The first quarter was flat, but it was a good flat, considering everything that was going on,” said Doug Coté, chief investment strategist at ING U.S. Investment Management.
“The good news during the quarter was a lack of drama out of Washington on the budget and the debt ceiling, and the Fed transition went smoothly,” he added. “The stock market is still basically at an all-time high, and it looks like it is shrugging off all the bad news.”
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The year’s first quarter, which officially ends Monday, was nothing if not an endorsement of diversification, according to Mr. Coté.
He cited the 8% gain for long-term U.S. Treasury bonds as a case for being fully invested and fully diversified, and not just defensive.
“I’m telling investors to get fully allocated to broader global markets, and that includes bonds as well, which have been a big surprise,” he said.
But even as the markets appeared generally calm during the quarter, there was enough volatility to suggest the bull market is transitioning into a more mature stage, according to Paul Schatz, president of Heritage Capital.
With that transition, he is expecting sector leadership to be coming from utilities, energy, consumer staples and semiconductors.
“We saw the volatility beneath the surface affecting the high-beta market leaders like Google [Inc.], Amazon [Inc.], and biotechnology stocks,” he said. “We are slowly transitioning to the last phase of the bull market, but that doesn’t mean it won’t last for another year or more.”
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Mr. Schatz also saw significance in the quietly surprising performance of longer-dated Treasury bonds.
“The performance was not the result of a fear trade, but it was driven by the perception that the economy was slowing,” he said. “The data started coming in and that manifested itself in the form of rates going down and the Treasury prices going up.”
If investors are feeling a little let down with a 1% gain on the S&P, it could be attributed to a hangover from last year’s 30% gain, according to Dick Wolfe, managing director at Saddle River Capital Management.
“I don’t think first-quarter earnings will be as bad as people expect, and I think second-quarter earnings will be even better,” he said. “As fundamentalists, we’re looking at earnings, and I’m looking for a positive year,”
John Gugle, principal and co-owner of Alpha Financial Advisors, is subscribing to the theory that things are still better than they might appear to be, even with a flat first quarter.
“My initial takeaway is that unforeseen global events like the situation in Russia and Ukraine had an outsized impact on the markets because earnings growth and Fed tapering are already priced in,” he said. “We would have had a pretty decent quarter if Russia had not gobbled up Crimea and threatened Ukraine.”