Time to Build Cash to Take Advantage of Stocks’ Coming Slump - Barron's

rinwengi.blogspot.com

Thursday marked the 100th day since the S&P 500’s low of March 23. Its 50%-plus rebound since then marks the index’s best 100-day gain.

Kasto80/Dreamstime

Summertime, and the livin’ is uneasy. Stocks are jumpin’ and the market is high. So, hush, all you skeptics, don’t you whine.

With apologies to the Gershwins and DuBose Heyward, this mangling of the lyrics of “Summertime” from Porgy and Bess seems appropriate, as the stock market’s benchmark, the S&P 500 index, is on the verge of reclaiming its record peak in this summer of our disquiet, if not discontent.

Stock market highs are associated with upbeat songs, such as Irving Berlin’s “Blue Skies,” to cite another tune from that bygone era. “Never saw the sun shining so bright, never saw things going so right,” went this popular 1929 ditty.

With the S&P 500 ending the week a fraction of a percent below its Feb. 19 high close of 3386.17, the disparity between the equity market and the real economy, which is struggling to cope with the coronavirus pandemic, remains stark.

As a measure of how far we’ve come, Thursday marked the 100th day since the S&P 500’s low of March 23, writes Ryan Detrick, chief market strategist of LPL Financial, in a research note. The 50%-plus rebound since then marks the best 100-day gain for the big-cap benchmark, “while millions of people have lost their jobs and tragically more than 160,000 Americans have lost their lives,” he adds.

In the past, large 100-day rallies usually were followed by continued gains, with stocks higher a year later in 17 out of 18 instances, Detrick adds. But other market observers see more risk than reward as the S&P 500 approaches its previous highs.

Sentiment is nothing if not frothy. That’s evident in the “very vigorous public participation” in the market, remarks Julian Emanuel, chief equity and derivatives strategist for BTIG. More than the massive rise in the “FAAGM” megacap tech names, froth was evident in the bidding up of recent stock splits, which made even less sense than the rush into bankruptcy stocks. (For more on splits, read this.) Given the availability of fractional shares on many online brokers’ platforms, the positive impact of splits on high-profile stocks, such as Apple (ticker: AAPL) and Tesla (TSLA), is further evidence of irrational exuberance that recalls the frenzy of the dot-com bubble at the turn of the 21st century.

More important, the disconnect between the stock market and underlying fundamentals is unequivocally the greatest in the past 30 years, Emanuel says in a telephone interview. There are other disconnects, too. A seemingly small example: To a football fan, it didn’t seem coincidental that the market rolled over when the Big Ten said that it would cancel the fall season, he notes.

Indeed, the S&P 500’s valuation at 26 times expected earnings, at the same time that the economy confronts the clear and present danger of a relapse, makes for a significant headwind to the stock market, Emanuel continues.

That’s even before considering the political season ahead, in which the invective will only get nastier, and continued wrangling over much-needed relief for households will persist. Then there’s the inexplicable but persistent tendency of the stock market to get battered in September, in the middle of the Northern Hemisphere’s hurricane season.

The key question for investors to ask themselves is how they would react in the event of a typical 10% to 15% correction, Emanuel says. Such a setback should be far from surprising, given the current state of the market and the underlying fundamentals. But it wouldn’t be the start of a new bear market, he emphasizes.

If you aren’t prepared to put more money to work in the market during such a drawdown, you own too many stocks now, he pointedly advises. He suggests taking some chips off the table to raise cash, and rotating out of the huge winners into laggard sectors, such as energy and financials, as well as health-care stocks.

What seems apparent is that investors have embraced the view of Dr. Pangloss, who famously asserted in Voltaire’s Candide that this is the best of all possible worlds, writes James Montier of GMO, the institutional money manager, in a client note.

Voltaire also wrote, “Doubt is not a pleasant condition, but certainty is absurd,” an observation that Montier says applies to the U.S. stock market.

Read the rest of Up and Down Wall Street: What, Us Worry? Lack of New Stimulus Hasn’t Roiled the Markets

Write to Randall W. Forsyth at randall.forsyth@barrons.com

Let's block ads! (Why?)

"stock" - Google News
August 15, 2020 at 07:34AM
https://ift.tt/2DNujYS

Time to Build Cash to Take Advantage of Stocks’ Coming Slump - Barron's
"stock" - Google News
https://ift.tt/37YwtPr
https://ift.tt/3b37xGF

Bagikan Berita Ini