Despite the sound and fury, the Dow Jones Industrials and S&P 500 were almost unchanged for the first quarter.
The NASDAQ did better, turning in a 3.5% return for the quarter.
Stocks were tossed around by a trifecta of worry. A rising US dollar, falling oil prices, and the specter of the Fed hiking interest rates kept investors off balance.
In March, the Dow Industrials moved up or down at least 100 points in 16 of the month’s 22 trading days.
My view on these three concerns is that they might cause a correction but will not derail the bull market.
Rising US dollar worries?
The rising US dollar worries investors because US companies need to present their financial results in US dollars. Much of the S&P500 earn a majority of their profits overseas. If the dollar strengthens the profits earned overseas become reduced in translation.
My view is that this is a short-term concern and doesn’t impact the long-term value of companies.
I’m also not convinced that the impact is that severe in the short-term. The multinational firms, like Coca-Cola, Procter & Gamble, and IBM have facilities and cost structures all over the globe, mitigating the US dollar impact. Despite the press, the evidence of correlation between the US dollar and US stock prices is not convincing.
Lower oil prices are a mixed bag
Lower oil prices are a mixed bag as well and difficult to tell how they will impact the overall stock market. Surely, lower oil prices hurt oil producers and the companies that provide services to them.
Energy companies make up about 16% of the S&P500. The flip side is that lower energy prices help consumers so there will be an offset with better earnings from consumer companies.
Unfortunately, the impact of lower oil hits the energy companies before the benefits can work their way through to consumers.
Over the next couple of quarters, oil will hurt overall S&P500 earnings. If oil prices stay low for a protracted period such that we see a good number of bankruptcies in the oil patch, a deep correction could well be in the cards. We are not there yet.
This leaves the Fed. I am in the camp that when the Fed actually makes the first rate hike, the stock market will fall into a correction, maybe a deep one. There were jitters in the quarter that the first rate increase could come as soon as June.
— Ian Green, Pendragon Capital Management
Note: This blog article is intended for general informational purposes only. Nothing in it should be construed as, and may not be used in connection with, an offer to sell, or a solicitation of an offer to buy or hold, an interest in any security or investment product.