article 06-17-2014

"As we approach the mid-point of 2014, stocks have still not established a clear direction for themselves."

As we approach the mid-point of 2014, stocks have still not established a clear direction for themselves.

Volatility is low, with The Wall Street Journal recently reporting that “historical volatility for some of the S&P 500 has fallen to some of its lowest levels since 2007.”

To be sure, both economic and market conditions appear sufficiently strong to keep the bullish trend going, as Charlie Dreifus has also recently argued.

Consider the following: Interest rates remain very low on an absolute level. After entering 2014 at 3.00% (and seemingly poised to move higher), the yield on the 10-Year Treasury has fallen, reaching a year-to-date low of 2.44% on May 28.

And while the Fed continues to taper, stimulation in the form of QE continues, albeit at a slower pace than in years past. Inflation is low, and commodity prices have been stable.

In addition, the deficit continues to fall here in the U.S. while European Central Bank president Mario Draghi recently made headlines by lowering the ECB’s rate to zero. This move may sound familiar to U.S. investors.

Add an increasingly robust M&A market, and the recipe for ongoing bullishness seems almost complete. Yet there persists a fairly vocal group who continue to insist that stocks are overvalued.

In our view, stocks, even small-caps, which have been distinctly underwhelming year to date, look overdue for a correction. However, the evidence for a further run-up remains compelling.

We feel somewhat fortunate in that we don’t need to choose a side in the ‘overvalued versus ongoing bull market’ debate. Rather than trying to make a correct market call, our attention is focused on those potential opportunities that can materialize even in a widespread bull market.

With diverse small-cap sectors such as Consumer Discretionary, Health Care, and Technology showing sizable declines since the end of February, we are looking closely there (and elsewhere) for what we think are attractively priced, fundamentally strong small-cap businesses.

Important Disclosure Information

Chuck Royce is President, Director of Investments, and a Portfolio Manager of Royce & Associates, LLC, investment adviser for The Royce Funds. Mr. Royce's thoughts and opinions in this piece are solely his own and may differ from those of other Royce investment professionals, or the firm as a whole. There can be no assurance with regard to future market movements.

The S&P 500 is an index of U.S. large-cap stocks selected by Standard & Poor's based on market size, liquidity, and industry grouping, among other factors. The performance of an index does not represent exactly any particular investment, as you cannot invest directly in an index.

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