JPMorgan Chase & Co.'s disclosure last week that it had sustained $2 billion in trading losses is one more worry for investors who have watched the stock market retreat after one of the best first quarters on record.
At the close of trading Friday, the S&P 500 was down 4.6% from the 2012 peak it reached in early April.
Despite the index's having been down in six of the last eight trading sessions, financial advisers and market analysts believe that the market's problems are minor compared with what it was dealing with this time last year.
“Even though Spain is now dominating some of the headline warfare in Europe, and Greece is back on the front page, this is not a replay of 2011 in terms of the capital markets and what we expect stocks to do this year,” said Timothy Holland, a portfolio manager at Tamro Capital Partners LLC.
While 2012 began with a strong equity market rally, markets around the world began falling off recent highs over the past few weeks.
While U.S. markets are off nearly 5%, that slide pales against declines in other countries, such as Japan, -11.7%, France, -13.3%, Russia, -15.5%, Italy, -19.7% and Spain, -24%.
Mr. Holland and others are willing to shrug off the recent market slides as part of the new-normal reaction to the end of a positive earnings season — one that now draws investor attention to anything remotely negative. After all, even with such a gloomy backdrop, the S&P 500 has gained almost 8% this year and has doubled since the March 2009 bottom.
“I feel like I'm on a very, very long plane ride, where as we go through earnings season, the market is less choppy and focused on fundamentals, but once we get out of earnings season, it gets choppy and people start worrying about politics again,” said Rex Macey, chief investment officer at Wilmington Trust Investment Advisors Inc.
“In 2010, we had a good start to the year, then volatility, and the same thing happened last year. Now after 2012's seeing the best first quarter on a percentage basis since 1998, we're seeing the same thing happen, and skepticism grows with each passing day,” Mr. Holland said.
But that general skepticism can also represent attractive opportunities, said Scott Wren, senior equity strategist at Wells Fargo Advisors.
“Last year, we were more balanced and more defensive, but right now, we're trying to get better positioned for the second half of this recovery,” he said.
On a relative basis, Mr. Wren said that he likes the improving direction of employment, consumer confidence and business optimism, as well as a projected gross domestic product growth rate of 2.5% this year.
Even though he thinks that the U.S. equity markets might have muted performance this year, he recommends being positioned for growth, with overweights in technology, materials and consumer discretionary sectors, and underweights in more-defensive categories such as health care and utilities.
“We can see from mutual fund flows that retail investors in general have missed the market's rally off its 2009 lows, because they've been in bonds, but stocks are going to be the better performer over the next 12- to 24-month period,” Mr. Wren said.
According to the latest data from the Investment Company Institute, equity mutual funds have had $16.9 billion in net outflows this year, while bond funds have had $125 billion in net inflows.
It isn't as if investors don't have plenty to worry about.
The latest triggers for concern out of Europe involve elections in France and Greece that appear to favor less austerity and more liberal spending patterns that will make it more difficult to manage mounting debt loads.
And with each passing day, the U.S. moves closer to the so-called fiscal cliff of Jan. 1, marking the beginning of dramatic spending cuts and potentially the largest tax increase in the country's history.
JPMorgan's trading troubles set off a flight from bank stocks Friday amid speculation that the final bank regulations under Dodd-Frank may be further toughened.
Paul Schatz, an active asset allocator as president of Heritage Capital LLC, is convinced that the bad-news backdrop will bring valuations into a range too attractive to ignore, even for the most risk-averse.
“If you wanted to be a bear and wanted to be worried, there are plenty of things to keep you worried. In the short term, we should get a market bounce and then one more shot to the downside that takes out the April lows, and there will be a big buying opportunity — but we're not there yet,” Mr. Schatz said.
jbenjamin@investmentnews.com
