After stocks’ hot start, is there room to rise?
History would appear to say, yes
The best yearly start for stocks since 1998 is making it costly for reluctant investors to sit on the sidelines — but also stoking fears the market has run too far, too fast.
It’s been a rip-roaring first quarter, with the benchmark Standard & Poor’s 500 index up 12.0%. And that barely topped the 11.1% gain in the fourth quarter — making this one of the few times the stock market has stitched together two consecutive quarters of double-digit gains. “We’ve had a nice run here,” says Howard Silverblatt of S&P Capital IQ.
Bulls argue that stock prices can rise more on solid fundamentals. Bears say speculation has taken over. Some things to keep in mind:
-Big pullbacks don’t necessarily follow a strong first quarter. History doesn’t support the theory that a strong start to the year sets investors up for a quick smackdown. If fact, the S&P 500 has risen 10% or more in the first quarter eight other times since 1945.
The market rose three-quarters of the time in the following quarter and gained 3.3% on average, S&P’S Sam Stovall says. And the one other time the market rose 10% or more in both the fourth and first quarters, stocks gained 5% the next quarter.
-Investors are still largely skeptical of the rally. Unlike a late-stage rally when investors are piling on hoping not to get left behind, investors remain doubtful, says Ryan Detrick of Schaeffer’s Investment Research. Investors pulled $1.2 billion out of stock mutual funds in February after taking out $423 million in January, the Investment Company Institute says.
-Perception vs. reality for
first-quarter earnings. Investors expect another record quarter for corporate profits in the first quarter, but expectations are modest and falling, says Chris Johnson of JK Investment Group.
Analysts expect S&P 500 companies to report 0.8% quarterly earnings growth, down from the 4.5% growth they expected at the start of the year, S&P Capital IQ says. With the bar low, stocks have upside potential as long as earnings aren’t horrific, and could be a pleasant surprise, Johnson says.
-Fading fear over Europe’s debt woes. Investors continue to price U.S. stocks higher on the growing belief Europe’s problems won’t severely hurt the U.S., says Richard Cripps of Stifel Nicolaus.
“People have not fully bought into this rally,” Detrick says. “There’s still price appreciation left.”