What Should You Fear In a Market at New Highs?
What could go wrong with the market reaching new highs? New home sales just surprised in June to the upside hitting a 9.5 year high. Interest rates still remain low and inflation is still below the 2% tepid benchmark the Fed is using. Earnings so far this season have been as expected meaning they are still negative, but less negative than last quarter. Finally, economic surprises according to the Citigroup Economic Surprise Index (a very nerdy set of indicators that will bore you towards deleting this) are in positive territory for the first time in 18 months (1). When even one of the markets biggest Bullies says that markets are a little too rich, we perhaps have a little too much heavy cream in our cheesecake. Fundstrat’s Global Advisor co-founder, Tom Lee, is worried about the short term. “We are scared about the month of August,” he wrote Friday, July 23, 2016 . Going back to August, 2009, the S&P500 has dropped an average of 6% during the month of August. Lee also points to a more bearish bond market than equity market and when that occurs “68% of the time, the stock market falls in the following month.”(2) Also given that valuations like Price to Earnings and Price to Sales ratios are at extreme highs, the entry points are a little daunting currently.
So, what should you be doing? If you believe like we do that markets have great opportunities to be higher at year’s end, then we’ve done most of the heavy lifting. Many of our clients are heavily weighted in investments that pay dividends. We continue to believe that dividend- oriented investments are still a great place to be when markets face a slip. Why? We believe you’ll still receive a dividend on that investment which could help offset any potential loss that may occur in the short-term and typically these types of investments don’t drop with the same velocity as growth-oriented holdings.* When investors stick their heads out of the foxhole after chaos, they tend to purchase less volatile, dividend centric investments, in our opinion.
*The payment of dividends is not guaranteed. Companies may reduce or eliminate the payment of dividends at any given time.
Since we are not market timers, we will continue to hold these investments through any small downturn that may come our way this summer. However, we are starting to feel more comfortable with growth oriented investments as we see technology and consumer discretionary assets doing better and better. We will look long and hard at more growth assets should we see a drop. The price point for these types of investments could be enticing. We also will be making sporadic purchases for our clients with larger percentages in cash on days where there are substantive dips.
So what is there to fear? In the short-term, we could see some pain. However, we believe the assets where we are over-weighted will help hold the line and present us with new opportunities when a larger drop occurs.