There’s no question that 2014 got off to a rocky start, as the first quarter was marked by a see-saw of new highs and sharp drops. We’ve seen this kind of volatility follow us into the second quarter, and I believe there’s more ahead as many of Q1′s storylines continue to play out.
Here are three factors I’ll be watching this quarter that could affect the market:
The World Stage: It’s no surprise that global activity will continue to be a significant factor for the markets in the second quarter. China may be the real wild card here and a big driver behind stocks in general during the period. After all, China’s demand for commodities and any number of goods from outside its own borders has helped keep the world economy growing (albeit anemically). If numbers continue to hint at slowing growth, stocks are likely to suffer.
Investor Rotation: I found it interesting that among the best performing sectors in the first quarter, high dividends and low volatility ruled the day. Healthcare and utility stocks outperformed the broader market, partly due to yield and defensive postures within the United States. Social media and consumer discretionary names suffered, as evidenced by Twitter’s (TWTR) 27% drop and Amazon’s (AMZN) 16% slide.
Earnings: As winter weather finally ends and the impact of the Washington, D.C. squabbling from last year subsides, we’ll get a clearer picture of just what companies are seeing “in the trenches” when they begin to report earnings this week.
Decent U.S. economic numbers, along with continued Fed dovishness, can help bring stocks higher this quarter. April is typically among the strongest months of the year, and good news from this key earnings season could go a long way to keeping that trend alive.
Banking on Security
Regardless of the unpredictable market we’re headed toward, there are still sectors that I expect to do well as they enjoy longer-term trends that are truly global. The sector I’m most excited about is cybersecurity.
As we just talked about, global issues have put pressure on stocks, including the latest uncertainty over an economic slowdown in China and concerns in Crimea. But they’ve also put cybersecurity issues back in the headlines again. There was a lot of “crossfire” between Russia and Ukraine as hacking groups in both nations have been shutting down sites across each other’s borders. For example, Ukrainian hackers claimed responsibility for a cyber attack that crashed two NATO websites ahead of the vote that saw Crimea move to join Russia.
The NATO site attack speaks to the fragility of “Internet peace,” and I believe we’re likely to see a lot more denial of service attacks and hacking activity in the service of politics over the next several years. It also means that firms providing technology to enterprises so they can protect their data will thrive.
Forbes recently noted that spending on IT security is likely to grow as much as 10-fold over the next several years. And here in the United States, there is a lot of work to be done to thwart future cybersecurity attacks.
In early March, First Data, a provider of electronic commerce and payment solutions, held a cybersecurity summit in New York. Panelists, including the head of EMC’s (EMC) security division, said the U.S. government must step up efforts to respond quickly and share information about cyber attacks – and companies themselves must do more to ensure communication about cyber threats with each other.
So who do I think stand to benefit from this trend? My two top tech picks in this sector are Akamai and Fortinet. Let’s take a look at both: