The Top 10 Surprises Of The First Quarter

Tyler Durden's picture

From Nick Colas of ConvergEx

Q1 2014 – Top 10 Surprises

U.S. stocks are like a duck, floating on a quiet pond – calm above the surface, but lots of furious churning invisible to the naked eye.  The S&P 500 looks like it will end the first quarter within a hair of the 1848 level where it started the year, but that doesn’t mean everything else is all stasis and light.  Today we offer up a quick ‘Top 10’ list of surprises from the last 90 days.  Gold, for example, is back from the grave, up 7.3%.  So is an imperial Russia, with the biggest land grab since the building of the Berlin Wall.  Mutual fund flows are ahead of exchange traded funds by a factor of 5:1.  And most of those ETF inflows are into bond funds, not the “Great Rotation” we all expected into stocks.  The 10-year U.S. Treasury yields all of 2.67%, and bonds have bested U.S. stocks consistently in 2014.  First quarter 2014 may not have been a long trip, but it certainly has been strange.

The number 1848 is synonymous with revolution.  Starting in France early in February 1848, populations in scores of countries from Latin America to Poland rose up, sometimes even overthrowing long established monarchies, with calls for greater democracy.  There was no Twitter back then, of course, or any of the other technological enablers we now consider essential for a truly modern uprising.  These were old-school revolts, but no less effective in their impact for want of a YouTube channel or Facebook page.

Fast forward to the current year and relocate the conversation to Wall Street, and the number 1848 is a good deal more benign – even boring.  We started the year at 1848.36 on the S&P 500 and 85 days later we are at 1849.04.  Excluding dividends, that is a 0.04% increase, and a negative return when adjusted for inflation.  Yes, we are coming off a strong 2013, but that lack of follow through is a notable shift from expectations just three months ago. 

That got me thinking about capital markets ‘Surprises’ generally, and it wasn’t too difficult – with the help of some ConvergEx capital markets professionals – to come up with a “Top 10” list.  Yes, I know Jimmy Fallon is beating the Worldwide Pants off David Letterman, but a series of “Thank you” notes didn’t seem to capture the “Spirit of 1848” in quite the right way. 

Here’s our list of Q1 2014 capital markets surprises:

  1. Geopolitical Headline Risk is Back – and No One Cares.  If you had told 100 traders at the end of last year that Russia would annex the Crimea and amass a sizeable military force on the Ukrainian border, 101 of them would have laughed in your face.  And then they would all have sold their risk assets.  Yet, even with this event now in the history books, U.S. equities are flat and European stocks are catching a bid late in the quarter.
  2. Gold Beats U.S. Stocks.  The yellow metal is back with a vengeance, up 7.3% year to date.  Yes, it is well off its 2011 highs of +$1,800, but rumors of its demise in 2013 were greatly exaggerated.  All the more impressive is the fact that this move comes with worries of European deflation and new Fed Chair Janet Yellen’s “Six month” doomsday clock to interest rate hikes. 
  3. Bonds Beat U.S. Stocks.  Look at any wide measure of performance for the fixed income complex – high grade corporates, their high yield cousins, or aggregate bond indices – and you’ll see YTD performance of +1.3 to +2.5%.  That’s much better than the stuck-in-neutral U.S. equity market.  Domestic stocks, in fact, have lagged their bond market competition in all but 5 days of 2014 when looking at YTD returns. 
  4. Mutual Funds Get Their Groove Back.  The aftermath of the Financial Crisis was especially cruel to the mutual fund industry, as retail investors reduced risk from 2007-2013.  Now, in 2014, total mutual fund flows as measured by the Investment Company Institute are +$85.7 billion through March 19th.  Of that total, equity funds got more than half, or $51.9 billion.  Domestic stock mutual funds may see their first 3 month streak of inflows since 2009 if the last half of March just holds flat for money flows.
  5. CBOE VIX Index Begins to Trend Higher.  Over the last few years, the only activity at most volatility desks on Wall Street was the occasional tumbleweed rolling through town.  The “Bernanke Put” made stock investors fearless, pushing their demand for options-based insurance dramatically lower.  Now, with the Federal Reserve talking up the need to start lifting rates, volatility is creeping back into stock markets.  We continue to believe that the VIX will grind its way higher in 2014 and average 15-20 as we move through Q2. 
  6. U.S. Treasuries – What, Me Worry?  The 10 year started 2014 at 3.03% and currently sits at 2.67%.  Everyone talks about how the horrid weather this winter hurt the U.S. economy; no one mentions that the weakness seems to have helped Treasury yields by dampening fears of accelerating economic growth and inflation.  Throw in some asset allocation trades from institutional investors anxious to lock in their 2013 stock market gains, and you have a measurable rally in the most hated asset class out there – bonds.
  7. Utilities Beat Tech – and Everything Else.  The top sector with the S&P 500 is Utilities, up 7.8%. With a 3.6% dividend yield, this group is the closest thing an equity investor can get to bond exposure in all-stock portfolio.  So, for 2014: Widows and orphans: 1, momentum investors: 0.
  8. Jan Brady (MidCaps) Finally Get a Date.  Of the three closely followed S&P market cap indices, mid caps rule the roost, up 0.6% in 2014.  One explanation: they are not as risky as small caps (down 1.0% in YTD) and not as international and heavily super-cap as the S&P 500 (flat). 
  9. Miss PIGSy Gets Her Frog.  Exchange Traded funds focused on Portugal, Italy, Greece and Spain are pulling in assets, to the tune of $1.0 billion year-to-date.  That’s especialy impressive considering their total asset under management are just $3.1 billion. 
  10. No Great Rotation.  The old saw that “Convention wisdom is always wrong” lives on in 2014.   This was supposed to be the breakout year for stocks, full of revenue growth, synchronized expansion in developed economies, and rising interest rates.  Yeah… Not so much.  Money flows into fixed income ETFs of $10.4 billion YTD outnumber those into equity products, with just $1.3 billion.  Interest rates seem well grounded, as noted previously.  If you had a flashback to high school History class at the top of this note, consider the following: “The Great Rotation is neither ‘Great’ nor a ‘Rotation’.  Discuss.

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qazwsx's picture

11. Man vs. Nail gun. 

NoDebt's picture

<---  Ooo!  Nail Gun.

knukles's picture

Pope blesses Obie
Obie burnt as heretic

Iconic intersection of Progressiveism and Religion

Hangfire's picture

I was hoping for a Santiago style blessing with sword held high!   

lordylord's picture

#1  surprise: The economy hasn't fell apart yet.

...or maybe it has and we are all zombies living in the post-apocalyptic economic wasteland and we don't know it yet.

Joe Davola's picture

They're looking for more with your unique qualifications in the State Department!

NoDebt's picture

Ya know, if they offered me that job, I might just take it at this point.  So much easer working for The Borg than out here walking the tightrope every day without a net.

Peter Pan's picture

11. The financial system has not imploded.

Headbanger's picture

12)  Obama still in office

q99x2's picture

US stock markets have nothing to do with what goes on in the world or what the actual value of a company is. The markets reflect whatever central bank software dictates. The globalists have taken complete control of US equities. So you have to factor in the risk of central bankers lowering the stock indexes.

My opinion is that they will not do this until they are ready to declare Marshall law. I place a 50/50 risk factor on that happening each day.The situation would be different if the United States of America still had national sovereignty but it doesn't. We are an occupied nation.

CouldBeWorse's picture

I'm not so sure I would go so far as saying we are an "occupied nation".   I'm more inclined to think we are a "preoccupied nation".    Preoccupied with finding jobs, making ends meet, planning for retirement, paying down underwater mortgages...putting kids through college...etc...etc...etc.

Iam Yue2's picture

"Russia gets largest inflows since May, as March proves best in more than two years. Russia-dedicated funds in the week through to Wednesday reported net inflows of $219 mln according to the EPFR Global report published overnight. This was the best week for Russia funds since mid-May 2013. Moreover, in contrast to the other weeks of the month, this time both ETFs and traditional funds reported net inflows, although the bulk of the inflows of $197 mln still went into ETFs. Most traditional funds also showed small net inflows, which resulted in traditional funds getting net $22 mln of new cash. Hence, judging by the weekly fund flow data March promises to be the best month for Russia-dedicated funds in more than two years, since February 2012 in the run-up to the presidential elections in Russia, which is good news for all Russian investors."

Uraslib Capital

"The largest Russia ETF trading in the U.S. is the Market Vectors Russia ETF (NYSEArca: RSX) and the fund is highlighting the folly of Carney’s advice. Since Carney’s short Russia call on March 18, RSX has pulled in over $202 million in fresh assets. Including Thursday’s gains, RSX is up 3.4% in the past five trading sessions. [Leveraged Russia ETFs Gain Fans]"


ebworthen's picture

Gold and bonds beat stocks, and Utilities beat Tech and everything else = flight to safety.

CouldBeWorse's picture that I would add...and the formerly timid lose their fear and enter the market for the first time since 2009  (mutual fund inflows).    These are the things that make ME go hmmm.   Are we at a market top?