NEW YORK (TheStreet) - Markets are unlikely to gain strong direction until well into spring, strategists said, warning investors to brace for further daily "churn" as geopolitical events dictate sentiment.
Gains in the S&P 500 have been broadly flat this year -- the index is up just more than 1% after shedding 5.5% in late January and hitting a new record of 1878.04 early this month. Markets have fluctuated between gains and losses on a daily basis as concern around the debt position of many emerging markets -- namely China -- rattles sentiment. Stocks were lower again Thursday, after Goldman Sachs downgraded its first-quarter GDP estimate for the U.S. economy to 1.5%.
Dan Veru, Palisade Capital Management's chief investment officer, said investors should prepare for another three to six months of churn in the markets. But he said individual stocks were performing better than indices suggested, noting that the outperformance of small companies was significant. The small-cap Russell 2000 index has returned 2.57% so far this year, with fund managers pointing to its lower exposure to emerging markets and higher M&A activity as drivers.
"Small-cap stocks are an indicator of domestic demand and a good indicator that the U.S. economy remains in an uptrend," Veru said in a phone interview. He suggested China's engineered slowdown to a more sustainable growth rate is not a major concern. A selloff in industrial metals this week was triggered by poor Chinese export data, raising fears around the outlook for the world's second-largest economy.
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But Veru questioned whether any indicators showed a slowdown in Chinese consumer spending. "The opportunity for the U.S. is to continue to do business with the emerging markets retail class," he said. "I firmly believe the super-cycle for commodities is over, but that's not a bad thing. Lower copper prices will make it easier for manufacturers and means better margins for companies."
ING Investment chief market strategist, Doug Cote, suggested there was reason to be wary over China. He noted copper demand had longed been viewed as a global growth proxy, with the 9.5% drop in prices this year raising fears around Chinese manufacturing growth. Cote noted tight lending conditions had also seen Chinese investors use copper for financing, as collateral for loans from banks.
"The sharp drop in copper coupled with last week's first corporate bond default and the unexpected trade deficit have again raised concerns about a China hard landing and potential contagion to other economies," he told clients in a note.
On the domestic front, UBS strategist Julian Emanuel noted S&P 500 company margins were at an all-time high of 8.8%, largely due to lower interest and tax expenses. Health care, technology and financial companies have the most cash on balance sheet, with 17.3%, 28.7%, and 15.5%, respectively, suggesting they have ample room to invest for growth or make acquisitions. But while fourth-quarter earnings growth helped markets in February, concerns around China's outlook and Ukraine politics have tempered gains this month, Emanuel noted.
"These uncertainties are likely to continue to weigh on equities until further signs of economic and earnings growth emerge along with the spring thaw," he said.
-- By Jane Searle in New York