Investors should be leery of a downturn in the stock market this spring, as the economy plods through "unfriendly" forces that will impede the economy. That's the assessment of Bruce Bittles, chief investment strategist for Robert W. Baird & Co. Inc., Milwaukee.
"With the seasonal winds turning chilly after April 15, interest rates rising above 5 percent, $3+ gasoline a strong possibility and housing in jeopardy, the backdrop is growing increasingly difficult for equities. Over the very near term, strong first-quarter earnings should help support prices, but with bond yields misbehaving, upside progress is likely to be limited," Bittles remarked in his weekly market report.
"Bond prices have broken down, causing yields all along the curve to reach multiple year highs in April. This could have negative ramifications for housing, which already was showing signs of stress. A weak real estate environment along with the prospects for an expensive driving season ahead is expected to cause consumer spending to slow in the next couple of quarters. This would suggest the Federal Reserve will cease raising rates soon, but given the strength in commodity prices any thoughts of possible rate cuts this year are premature. Best assumptions are that the Federal Reserve will raise rates 25 basis points on May 10, but will use a 5 percent fed funds as a reason to pause into the summer months," Bittles said.
Given the economic slowdown, value stocks would be better investments than growth stocks over the short term, Bittles said.
"The deterioration in the market internals favors value strength, as does the recent increase in investor optimism. The likelihood that we are in the final stages of a cyclical bull market also supports value relative to growth, as does the secular shift in interest towards dividend-paying stocks. Overall, the trend favoring value over growth remains intact, and could intensify if second-quarter stock market weakness emerges," he said. "Considering high interest rates are the economy's and stock market's No. 1 nemesis, investor caution is warranted. In a debt-based economy, sharply rising interest rates are expected to take a toll on consumer spending as the year unfolds."
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