2014 First Quarter-A Mood Shift

The year 2013 ended on a high note with the S & P up a whopping 29.6% for the year. The first quarter 2013 saw the S & P up 10%. The Russell that includes small and mid cap securities rocketed up 37%. With that stellar performance investors looked to 2014 with rare optimism. Only 16% of investors were bearish. However, starting on day one of 2014 the markets and the world turned turbulent. The major averages sold off sharply, then recovered to end the quarter barely nudging from their 2013 levels. The Russell did not fare as well. It was down 4.7% for the quarter, pointing to an exodus from small and mid cap stocks. The average investor pulled $4 billion out of mutual funds.

Some of darlings of 2013 saw prices selling well off their highs. Facebook (FB) is down 16% and Tesla off 20%, placing it in sell territory. Investors lost some of their enthusiasm for IPOs. A recent offering, Candy Crush, fell 16% on the first day of trading.

One cloud overhanging the market is the Fed’s tapering program. From purchases of $85 billion per month in 2013, monthly cuts of $10 billion per month has brought purchases down to $55 billion per month. This has taken a large pool of trading capital off the table. The Fed has also given a subtle signal that they would raise interest rates in 2015. This is much sooner than previously stated.

Investor exuberance of 2013 has pushed markets in North America and Europe into overbought territory with a reading 106% of aggregate fair value. By contrast 2013 saw Asia Pacific markets in overbought condition. In 2014 this has flipped and now Asia Pacific markets are in oversold territory with a reading of 92% of intrinsic fair value.

On the global stage we see increasing unrest in Turkey considered a key ally to the West. Then, in short order, we saw the Russian take over of Crimea, a Ukrainian province. Banks in Russia and the West are scrambling to protect their assets. Russian bankers are pulling money from the West and bringing it home to Russia. However, there are large Russian and Ukrainian investors who are fearful of Russian currency curbs and are moving money into the Euro.

The aggregate of these factors has changed the mood of investors as we move into the second quarter. Analysts are shifting their calls to more conservative stocks that can withstand uncertainty in the long run. Names like Unilever NV (UND), Coca Cola (KO), McDonalds (MCD) and Wal Mart (WMT) are mentioned. In the technology you have IBM (IBM) and Cisco (CSCO).

Morningstar considers the energy sector undervalued. They mention names like Ultra Petroleum (UPL), Devon Energy (DVN), Denbury Resources (DVN) Energy Transfer Partners (ETP) and Tesoro (TSO.

For investors, this is wake up call to take a close look at their portfolios. It can be time to weed out the weak sisters and either go to cash of move into more defensive stocks. It could be prudent to place stop loss orders to protect existing profits.

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