5 first-half surprises that will continue through year's end

Jeff Macke

With six months gone, 2014 has been a year of financially rewarding somnambulance, complete with new highs in the Dow (^DJIA) and S&P 500 (^GSPC). The biggest single surprise has been the fact that stocks have failed to break, despite the fact that, in some ways, a worst-case scenario is playing out in terms of the economy. Six months ago we knew the weather was bad, but if you’d been told GDP would come in at -2.9% for the first quarter, the only safe assumption for stocks would be either much higher thanks to the Fed, or a bloodbath.

Nope. Just plodding along to new highs.

In the attached clip, Nick Colas of ConvergEx runs through five of the biggest shocks of the first half and predicts how they’ll play out heading into the last half of this curiously benign year.

1. High frequency trading is now a thing

Thanks to the Michael Lewis book and immediately infamous “The market is rigged” 60 Minutes interview, Americans are now aware of high frequency trading and understand it just well enough to know it’s a bad thing for most of us. Colas says headline crackdowns like the case against Barclays (BCS) are going to be with us for a long time.

2. Rates madness

“We all thought rates would go up as the economy improved and obviously they went down,” says Colas. He’s looking for a reversal though, perhaps to as high as 3.2% on the 10-year in the next six months, as the economy improves. (NB: he wouldn’t actually bet on it).

3. Mom and pop investors still not taking part

“Since the March 2009 lows, people have taken out over $350 million from equity mutual funds and missed out on that rally,” says Colas. They aren’t coming back in his mind. The second half will continue to be driven by buybacks and institutional investors.

4. Large caps will continue to outperform

Technicians get worried when small-cap stocks underperform the major names in the S&P 500 and Dow, but Colas isn’t sweating it. He likes foreign economies and expects that to be one of the factors that works to the benefit of larger American corporations and their stocks.

5. Volatility is dead

Trading floors have been a good place to catch a nap in the first half and Colas sees that continuing. “We look forward to a fairly dull summer and fall, the same kind of trend.”

We should be so lucky.

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