S&P 500 Rises 6 Months Straight: How Much Gas Left?


Powering higher for a sixth month straight, S&P 500 index funds soared to a new zenith in April.

Strong Q1 earnings reports, falling gas prices and continued momentum in the housing market offset investor fears over U.S. government budget cuts, bailout in Cyprus and weak growth in Europe.

SPDR S&P 500 ( SPY ) added 1.92% in April.PowerShares QQQ ( QQQ ), tracking the 100 largest nonfinancial stocks on the Nasdaq, added 2.54%.

"The advance has come in the face of generally lackluster economic data and fair earnings reports as investors have focused primarily on accommodative central bank policies around the world," Sam Subramanian, founder of AlphaProfit Investments, said in an email.

"The tepid pace of U.S. economic growth (at an annualized rate of 2.5% in the first quarter) has reinforced investors' belief that the Federal Reserve will continue its stimulus measures," he added.

With a little more than half of S&P 500 companies having reported Q1 results, earnings are up 3.9% year over year, though sales are down 0.3%, according to Thomson Reuters. Among those that reported, 70% beat analysts' estimates, 10% met and nearly 20% missed. More than half missed sales projections.

"Earnings are still very good and that makes valuation models supportive of even higher prices," said Vinny Catalano, president of Blue Marble Research Advisory.

Gas prices on average nationally fell 3.5% in April to $3.55 a gallon, or 9% below 2012's average price of $3.89, according to AAA. Home prices across the country, as tracked by the S&P Case-Shiller index of 20 major markets, increased 9.3% in the 12 months ending February. That was the strongest growth rate since 2006.

"Strengthening in home prices is a plus for growth through various channels, including increased consumer spending because of wealth and confidence effects, increased incentive to buy before prices go up some more, and increased incentive to lend because of less chance of mortgages turning delinquent," said Jim O'Sullivan, chief U.S. economist of High Frequency Economics.

Jim Farrish, founder of SectorExchange.com, recommends investors lighten up on several defensive areas that have outperformed among the 10 S&P sectors. He feels they're overvalued. Represented by SPDR ETFs , the areas areConsumer Staples ( XLP ), up 2.94% in April,Utilities ( XLU ) up 5.96% andHealth Care ( XLV ) up 2.87%. "They will be a buy on a pullback in the broad markets," Farrish wrote in an email.

Foreign Markets Outperform

Europe and Japan's stock markets climbed the proverbial wall of worry.IShares MSCI EAFE Index (EFA), tracking developed foreign markets, surged 5.02% as the dollar slipped against the euro and bond yields across the region fell to new lows.CurrencyShares Euro Trust (FXE), measuring the 17-country currency against the greenback, rose 2.71%.

Investors embraced risk assets on expectations that weak economic data will prompt governments to unleash more stimuli and ease austerity measures. The eurozone's unemployment rate rose to a record 12.1% in March. Consumer price inflation fell to 1.2% in April, undercutting the European Central Bank's target rate of just below 2%.

Economists contended the ECB would likely cut the prime interest rate from 0.75% to 0.50% at its policy meeting Thursday.

A 25- or 50-basis-point cut would likely fail to inspire businesses and individuals to borrow money from banks, says Robert King, an economist at the Jerome Levy Forecasting Center. In addition, European banks have loads of bad loans on their books and continue to tighten lending standards.

WisdomTree Japan Hedged Equity (DXJ) surged 10.12% to a five-year high, pumping this year's vertical ascent to 29%. The Bank of Japan announced in early April, it aims to double monetary base to $2.9 trillion by the end of 2014 to achieve a 2% inflation rate. This follows an unprecedented $116 billion economic stimulus package unveiled in January.

IShares MSCI Italy (EWI), up 11.44%, outpaced all country ETFs except Global X FTSE Greece 20 (GREK), up 16.44%, on investor optimism that the new government will undergo aggressive measures to jolt the economy. Meanwhile, Italian and Spanish government bond yields fell to their lowest levels since 2010.

IShares MSCI Emerging Markets Index (EEM) rose 1.22% in April, snapping a three-month losing streak. The commodity-dependent economies have lagged global markets this year because of overproduction of steel, copper and oil coupled with waning demand from developed countries and weaker-than-expected GDP growth in China.

Gold Meltdown

SPDR Gold Shares (GLD), the largest ETF tracking the yellow metal, ended the month down 7.57%. It's tumbled 23% from its historic 2011 high. GLD rebounded after tumbling a whopping 14% over two sessions midmonth on fears that Cyprus and other European countries would sell their gold reserves to pay for bailouts and expectations for deflation.

The silver lining in the sell-off has been increased physical demand for bullion, coins and jewelry, especially in China and India, which account for half of global demand.

Gold miner ETFs crashed hardest in April.Market Vectors Gold Miners (GDX) collapsed 19.79% to a four-year low.Market Vectors Junior Gold Miners (GDXJ) crashed 23.42% to new all-time low.IShares Silver Trust (SLV) fell 14.47%.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , ETFs

Referenced Stocks: QQQ , SPY , XLP , XLU , XLV

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