Is Market Divergence Highlighting Weaker Economy?

2014 market chartThe S&P 500 closed the month at an all-time high of 1923.57. It is up 4.14% YTD. Meanwhile the NASDAQ Composite was up 1.69% last week to close at 4242.62 up 1.34% for the year. The Russell 2000 Index (a much better gauge of the broader market, in my opinion) is still down 3.07% for the year. There is an incredibly large 7%+ market divergence between the S&P 500 index gains and the Russell 2000 loss year-to-date. What does that tell us?
My take is that this market divergence highlights the fact that the U.S. economy continues to struggle. And that the markets have yet to factor that in.
For instance, I read a blog this morning from The Wall Street Journal where Goldman Sachs says “Almost all clients have the same outlook: 3% economic growth, rising earnings, rising bond yields and a rising equity market.”  And, I believe, they are wrong.
US GDP Q1 numbers were revised last week and now show that the economy did NOT grow in the first quarter—it actually contracted. Yet, Wall Street economists and most investors continue to believe that our economy will still achieve growth of 3+% in 2014. That is almost a mathematical impossibility, but don’t confuse investors with the facts. By the way, big investment banking firms get paid handsomely when their clients think the markets will continue to go up…
Do you remember the ‘R’ word? RECESSION. I haven’t seen any economists that were predicting a recession in 2014. A recession is generally identified as 2 successive quarters of declining GDP. We’re half way there already. Now I’m not predicting a recession either, but I don’t think we’ll achieve anywhere near consensus growth. That means that we still have further opportunity to profit if the consensus opinion adjusts in the direction of a slower-growing economy.
Those investors who have invested based on this 3-4% 2014 GDP scenario (i.e. growth and high beta stocks) haven’t fared too well this year as evidenced by the 3.07% decline in the Russell 2000. Those that have invested in slow-growth, dividends, bonds and/or REITS have fared much better.
As a money manager, I have not moved a lot of money into the US Stock market lately. I have moved more money into the Canadian stock market which is up 7.62% YTD. Further, my bond positions continue to do well. So, I’ll just stick with what is working and wait for Goldman’s clients to catch up.

A Look At My Trending Indicators:

US Stock Market                  Trending Down

Canadian Stock Market       Trending Up

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US Bond MarketYields         Trending Down

Thanks for reading and have a great week!     …On a personal note, let me brag on my beautiful wife and daughter who will be appearing on TLC’s Next Great Baker Season 4 airing June 24th. Here’s a flyer we’ve put together:  Thanks for reading and have a great week!

Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.