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Can Equities Continue to Rally in Q2?

U.S. equity market kicked off 2013 on a strong note, with all three benchmark indexes posting significant gains in the first quarter. The rally was driven mainly by an improving outlook for the U.S. economy. The big question is can the rally continue in the second quarter?

Market Rises to Multi-Year Highs in Q1

Equity markets rose to multi-year high levels in the first quarter of 2013. The Dow Jones, in fact, touched an all-time high level during the first quarter. The S&P 500, meanwhile, inched up to its all-time high level.
During the first quarter of 2013, the Dow Jones rose 11.25%, the S&P 500 rose 10.02%, and the Nasdaq rose 8.21%. The rally was driven mainly by improving outlook for the U.S. economy.

Economic data released during the first quarter suggested that the U.S. economy is seeing a strong recovery. The most encouraging thing was that the labor market continued to show signs of improvement. The labor market has been recovering since late last year, and the trend continued in the first two months of 2013. The improvement in labor market, coupled with the ongoing recovery in the housing market, lifted consumer sentiment in the first quarter.

Apart from improving economic outlook, market sentiment was also boosted by the last-minute fiscal cliff deal. The fiscal cliff issue had kept investors and consumers on the edge during the last quarter of 2012. The fiscal cliff deal was signed at the start of this year, and has ended a great deal of uncertainty.
Other factors that boosted investors’ confidence during the first quarter were a recovery in the Chinese economy, measures taken by Japanese policymakers to boost economic growth and fight deflation, and an easing of the euro zone debt crisis.

Major Movers in Q1

Major U.S. banks had an excellent run in the first quarter. The best performer among the big five U.S. banks was Goldman Sachs Group Inc. (NYSE: GS). Shares of the Wall Street giant rose 15.35% during the first quarter. Citigroup Inc. (NYSE: C) was the next best performer, gaining 11.83% during the quarter. Wells Fargo & Company (NYSE: WFC) gained 8.22%, J.P. Morgan Chase & Co. rose 7.94%, and Bank of America Corp. (NYSE: BAC) rose 4.91%.
U.S. banks have benefiting from improving outlook for the economy. With interest rates at record low levels, lending activity has picked up. Meanwhile, stabilizing financial markets are expected to continue to boost banks’ trading revenues. M&A activity has also picked up pace, which should boost investment banking revenue at major U.S. banks.

In the technology sector, Research In Motion Limited, doing business as Blackberry Ltd., (NASDAQ: BBRY) was the big comeback story. Blackberry had been virtually written off last year as the company continued to struggle amid increasing completion from iPhone and Android operated phones, and product delays. However, in January this year, Blackberry began a strategic transformation. The company launched two new phones in January, as well as its much-awaited operating system. The company also changed its name from Research In Motion to BBRY and its ticker from RIMM to BBRY. Right at the end of the first quarter, Blackberry also surprised investors and analysts by returning to profitability in its fourth quarter of fiscal 2013.

During the first quarter of 2013, Blackberry shares gained 21.69%. While Blackberry shares rallied in the first quarter, Apple Inc.’s (NASDAQ: AAPL) poor run, which began in October last year, continued. Apple shares have been struggling as the company’s recent products have failed to make a mark. The iPhone maker is also facing increasing competition from Google Inc.’s (NASDAQ: GOOG) Android operating system. During the first quarter of 2013, Apple shares fell 16.82%.
Other major movers in the tech sector during the first quarter were Google, which gained 12.26%, Microsoft Corp. (NASDAQ: MSFT), which gained 7.09%, International Business Machines Corp. (NYSE: IBM), which gained 11.34%, and Intel Corp. (NASDAQ: INTC), which gained 5.88%.

Facebook Inc. (NASDAQ: FB) shares struggled in the first quarter even though the company continued to boost its mobile capabilities. Facebook shares had tumbled post its much-hyped IPO in May last year amid worries over the company’s mobile strategy. However, the company has been making a shift towards mobile. In the first quarter of 2013, Facebook shares fell 3.91%.

While Facebook struggled, shares of professional networking site LinkedIn Corp. (NYSE: LNKD) rose 53.34% during the first quarter. Groupon Inc. (NASDAQ: GRPN) and Zynga Inc., the other two major social media stocks, also rallied in the first quarter. Groupon shares gained 25.92% during the first quarter, while Zynga shares gained 42.36% during the quarter.

Can the Rally Continue in Q2 and Beyond?

The big question market participants are asking after an exceptional first quarter is whether the rally in equity markets will continue in the second quarter and beyond?

The second quarter has begun on a disappointing note, with the S&P 500 and Nasdaq currently in red. Equity markets have struggled in the first few days of second quarter as investors digested some unexpectedly weak labor market data. The March jobs report showed that the U.S. economy added only 88,000 jobs, significantly below the consensus forecast. The ADP jobs report for the month of March, meanwhile, showed that the private sector added less than forecast jobs in the final month of the first quarter. The two reports have raised worries over the labor market.

For the rally to continue, the U.S. economy will have to continue to show signs of recovery. While the recent labor market data has been exception, investors will be hoping that it was an exception. If the recovery remains on track, then the second quarter could see investors continue to pour money into equities.
The ultra-loose monetary policy from central banks in developed world has also helped risk assets. Just last week, the Bank of Japan (BOJ) announced aggressive monetary measures to boost economic growth and fight deflation. If the central banks continue with their aggressive measures, one can expect risk assets to continue to rally.

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