The summer is almost over again. Although meteorologically and astronomically speaking the season will last for a few more days or weeks, the better part of it is behind us and ultimately you could say the same about the financial markets. Everything is quiet on the surface, but the wider market is barely able to get ahead. This is also what we have seen all year: a few steps forward and a few steps back, but it is not going anywhere. Even more, a few important indices are barely in the green year-to-date, which is quite the contrast with previous years in which yearly gains surpassed historical averages by far.
In Sprout Money’s latest free newsletter we covered the progress of some of the market heavyweights and a few other segments, of which the poor performance of the Dow Jones was definitely the most remarkable. The only real stronghold for traditional stocks is technology (NASDAQ), which is also the one thing that is keeping the broader S&P 500 index from embarrassment. Digging deeper we found few positive outliers, but mostly losers among which the European stocks (DAX: -2,2%).
In our opinion this is not necessarily a bad development. These last few years the market has only crept higher, which at times made us worry about the sustainability of the current bull market. A few moments of peace and quiet on the markets can only be good news for the coming years, but that also means that we are probably not going to see any fireworks over the coming months. To the contrary, we are expecting volatility to pick up and the market to become much more turbulent with surprises to the upside and the downside. As a consequence, one can only guess where the indices will end up this year, although we do not expect them to land far from where we are now, because that is what has been on the menu for the entire year of 2014.
A few segments are performing above average this year. The laggards are definitely picking up the slack and, although commodities have left us with mixed feelings in general, a few laggards in that segment (among which is gold) have started to catch up. Other important commodities, like oil for example, are also doing well. Another market segment that is performing up to standard this year: emerging markets. This segment has been the punching bag of the financial world for years, but in 2014 this is no longer the case. The MCSI Emerging Markets ETF is listed no less than 8.7% higher, which is mostly related to the strong performance of specific countries – China and India in Asia and Brazil in South America. The emerging markets have definitely made a comeback.
A final segment that has gotten ahead of the pack with relative ease is the gold mining sector, which is probably the most hated segment of the financial markets in recent years. The strong correction in gold last year wreaked havoc in the gold mining sector and had a strong impact on valuations with share prices taking an 80% nosedive on average. That is, of course, already more than you need to know as an attentive investor: when a market segment loses three quarters of its value, you can expect an impressive rally to compensate for it. That is also exactly what we are seeing right now, as the average gold mining stock is listed 23% higher in 2014!
Some analysts are calling it a junk-rally, which would indicate the end of the bull market. In their view investors buy laggards in the last phase, which could be an explanation for what we have seen in 2014. We believe, however, that the market favorites of yesteryear are being picked up again, because traditional segments have become unattractive after years of unstoppable growth. It is not that we find the market too expensive in general, but it is high time for a break.
We expect this break to hold up for a little while longer, with more turbulence towards the end of the year because of higher volatility. We have already seen that large investors, among which George Soros, are hedging against that scenario to protect their portfolios as well. Laggards will remain in demand because they have quite some catching up to do. Gold mining stocks still need to double in value, for example, to end up around their historical average. Be vigilant, pay attention to your cash position, and give preference to the current winners of 2014.
>>> Will the gold price crash or rally from here? Find out now!
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