What Should You Fear In a Market at New Highs?

141002113904-fear-and-greed-explainer-00000515-1024x576What 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.

1. LPL Research, Weekly Market Commentary, “Breakout” July 25, 2016 2. “Big bull Tom Lee admits: ‘August scares us’ and here’s why.” Alex Rosenberg. 7/26/2016 CNBC. http://www.cnbc.com/2016/07/26/big-bull-tom-lee-admits-august-scares-us.html
• The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful. • The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. • Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal, and potential liquidity of the investment in a falling market. • Because of its narrow focus, specialty sector investing, such as healthcare, financials, or energy, will be subject to greater volatility than investing more broadly across many sectors and companies. • The PE ratio (price-to-earnings ratio) is a measure of the price paid for a share relative to the annual net income or profit earned by the firm per share. It is a financial ratio used for valuation: a higher PE ratio means that investors are paying more for each unit of net income, so the stock is more expensive compared to one with lower PE ratio. • Earnings per share (EPS) is the portion of a company’s profit allocated to each outstanding share of common stock. EPS serves as an indicator of a company’s profitability. EPS is generally considered to be the single most important variable in determining a share’s price. It is also a major component used to calculate the price-to-earnings valuation ratio. • The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The S&P 500 is an unmanaged index which cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. • The Citigroup Economic Surprise Indices are objective and quantitative measures of economic news. They are defined as weighted historical standard deviations of data surprises (actual releases vs Bloomberg survey median). A positive reading of the Economic Surprise Index suggests that economic releases have on balance been beating consensus. The indices are calculated daily in a rolling three-month window.