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Last month we indicated that we were somewhat nervous about the very short-term outlook for stocks. Our concerns were due to the fact that markets had turned down in the second quarter in each of the prior three years, earnings were slowing down and more likely to miss expectations in the quarter, and investor sentiment had simply gotten too bullish recently. On top of that, economic numbers had softened after a robust start to the year in the U.S. The data from Europe had deteriorated further and, despite the optimistic plans of Prime Minister Abe to reflate the economy, Japan was still mired in a deflationary downturn. The U.S. economy had gone through a ‘spring swoon’ in each of the past three years, as shown by the ISI Diffusion Index in the chart below. The economic data in the 2nd quarters of 2010-2012 all showed some slippage from the 1st quarter, which lead to a correction in stock prices until the economic data turned up again in the 2nd half of the year. While we don’t think we will see the same sort of ‘swoon’ this year, the data has clearly been ‘missing the mark’ in the U.S., Europe and China over the past month.
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