Tuesday, June 16, 2015

Stock Investors Should Hope 2015 Is A Repeat Of 2013

Market similarities comparing this year to 2013 are beginning to rise to the forefront of investors' minds. For equity investors, let's hope 2015 is a repeat of 2013. In 2013 the bond market experienced a "taper tantrum" as the Fed was preparing to end its quantitative easing programs. From early May 2013 to mid September the 10 year US Treasury yield rose from 1.7% to 2.9%. On an absolute basis, this is a significant rise in interest rates and caused bonds to selloff.. The iShares 20+ Year Treasury Bond ETF (TLT) fell over 17% from May 2013 to year end 2013.

Investor sentiment during this period took a hit as well. At the start of 2013 bullish investor sentiment as reported by AAII was in the low 50s. Bullish sentiment fell to 19 in April of 2013 and recovered slightly into June. Interestingly, bullish investor sentiment this past week reached approximately 20 and at a level reached in early 2013. The bullish sentiment levels for the first week of June in 2013 and 2015 are nearly identical as can be seen on the below chart.

From The Blog of HORAN Capital Advisors

Also of note in the top chart above is the decline in the S&P 500 Index during the beginning of the taper tantrum (mid-May to mid-June) was only 5.8% and for the balance of 2013 the S&P 500 Index was up nearly 20%. For the entire year of 2013 the S&P 500 returned 32% reminding us stocks can move higher in spite of rising interest rates.

As the bottom chart above for 2015 shows, a similar pattern appears to be taking shape this year. One difference, however, is the fact the S&P was up 13% from January to June 2013 and is only up 1.8% so far in 2015. It is not likely S&P 500 returns for the balance of 2015 match those of 2013, i.e, up mid to high teens, for a number of fundamental reasons; however, equities can move higher in spite of interest rates rising. The Fed releases comments from the end of its two day meeting tomorrow afternoon. At the beginning of the Fed's actual act of increasing rates, equities will likely be volatile.

By scanning recent news headlines (here and here), broadly, it seems investors are positioned for an equity correction. The market though generally does not experience a correction when the majority of investors are positioned for one. 

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