Hutchens Investment Management: Sell in May and Go Away?

CONCORD, N.H. - July 16, 2013 - PRLog -- Rates on the benchmark 10-Year Treasury rose from 2.06% prior to the Fed June meeting and rose to 2.71% on July 5th, since then it has fallen back to 2.55% today. A mass exodus out of fixed-income mutual funds and ETF’s occurred in June as interest rates spiked up on fears of the Fed doing what it said it would. Mutual fund outflows last month totaled $60 billion and $9 billion for ETF’s. However, these sales pale in comparison to the $850 billion of net bond inflows into mutual funds over the past four years. A continued liquidation could provide substantial impetus for stock prices and may prove the beginning of the anticipated “Great Rotation.” We will not have to wait too long to see if a portion of this outflow finds its way into equities, as earnings season provides investment opportunities. We believe that this recent rise in rates is “baked into equity prices” and any additional fear mongering will have little, if any, lasting effect on the resurgent bull market.

Analysts are once again predicting lackluster quarterly earnings. Stocks have continued to rise and if forward earnings are a major driver of stock prices as we believe, earnings will pick up as we move through 2H2013. Thus far the earnings story has been the financials; JP Morgan, Wells Fargo, and Citi, all of which surpassed both estimated earnings and revenues in a sector forecast to show a 2Q2013 year-over-year EPS increase of 18%. Most Wall Street strategists are content passing on 2Q2013 earnings. The sentiment is that sharply lowered earnings estimates will be surpassed. Consensus earnings and revenue estimates for the S&P 500 are +2.4% and +1.4%, respectively. Among the sectors expected to show EPS declines are; Basic Materials (-7.7%), Technology (-3.7%), and Industrials (-2.6%). Going forward as the recovery broadens globally these economic sensitive sectors will move to positive comparisons. But in reality the US economy is improving and stocks, measured by the S&P 500, are only about 6 1⁄2% above the October 2007 previous bull market record. Based only on these performance numbers, not much has happened over the past five years. However, we have been through cyclical hell, and now the end is in sight. Our optimism for the rest of 2013 is based on the improving domestic economy driven by a more liquid and rational consumer. The housing market has much further to go and a strong dollar will be translated by foreign flows into US equities. Energy independence sits at our doorstep.

We did not go away in May and continued to maintain a full position in equities. Any increased volatility is indicative of market uncertainty, not of a chaotic outcome of Fed policy. The recent short-term sell-off was more a technical correction than policy related.

Authors:
David Minor
Rebecca Goyette

Editor:
William Hutchens