Playing the Waiting Game
Since the 2012 election, we have been preparing for that inevitable pull back of 5-10% that this market seems unwilling to release from its clutches. We continue to see Wall Street discounting what most of us would consider some very scary stuff i.e. possible sequestration; future battles to increase our debt ceiling; a runaway deficit; budget battles that will undoubtedly mean higher taxes; and the Middle East’s possible implosion. With all of these headwinds, the Volatility Index (the futures contracts that shows current risk in the markets) is sitting at the cushy low price of 12.82. In January, 2009, this index was in the nosebleed altitudes exceeding 70. So the obvious question from you should be, ‘With all this chaos, can this upward movement continue.’ I have two answers for you: Yes and No. How do you like that hedging?? In the short term, we feel a headline or two will push the VIX up quickly having negative impacts immediately on the markets and a sell-off will ensue.
In the last week in January and first week in February, Lipper Weekly US Fund Flows saw equity mutual funds receive nearly $10B of new money inflows. Actually, it was the first time since 2009 that Lipper has seen five straight weeks of positive equity deposits. When we see run-ups like this, we believe that ‘Widows and Orphans’ are now participating meaning it’s time to be wary. Robert Luna of SureVest Capital Management says the quick flow of money into stocks may already be cause for concern even without the automatic spending cuts set to kick in March 1, but other good options are scarce. He goes on to say, “January was an outstanding month for the S&P 500, so even without sequestration the market’s a bit vulnerable here. But we have to place people’s money where it can get a return. Sitting on cash is not going to do it. Government Bonds—you’re already seeing people lose money here this year.”
Since both sides of the aisle seem reticent to allow sequestration to occur, that should be the catalyst for the pullback. It is at that point that many analysts think that will be a great time to rotate from bonds and use idle cash to take advantage of the dip. Art Hogan of Lazard Capital Markets and frequent CNBC contributor says “the six percent move that we’ve seen so far in ’13 may get cut in half as we watch the drama play out in Washington.” Regarding bonds versus stocks, he says “I think the crowded trade is the fixed-income market. I think the rotation (movement from bonds to stocks) happens in ’13.”
I know you are probably saying, I understand that the market is ripe for a pruning, but we are nearing all-time highs on the Dow and S&P. I remember what happened in 2008 after all-time highs. If you look at Price to Earnings ratios from a historical perspective however, prices are very low. Currently, the PE ratio on the S&P is 14.9% which is below the average of 18.8 since 1998. It is also significantly lower than the peak PE’s in the five prior bull markets seen in the post-World War II era which include a PE of 16.8 in the 2007 bull and whooping 28.2 in the market peek in 2000.
According to LPL Financial’s own Chief Strategist, Jeffrey Kleintop current valuations are the big reason why this rally has more room to run and why buying on the stumbles makes great sense. “There might be some ups and downs, but we will likely have another leg up in this bull market. Bull markets end at higher stock market valuations” than current pricing so “the bull market is not likely to be over and we’ll likely have another leg up.”
We believe this market will offer additional opportunities. However, playing the waiting game is essential to play it right. We feel that the Washington buffoonery will continue having a negative impact on our portfolios in the near term. However, history shows us that current pricing affords us opportunities despite all of our leader’s inadequacies. Continue to play the waiting game with us and you should be rewarded for your patience.
There is no assurance that the techniques and strategies discussed are suitable for all investors or will yield positive outcomes. The purchase of certain securities may be required to effect some of the strategies. Investing involves risk including possible loss of principal.
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 references is historical and is no guarantee of future results. All indicies are unmanaged and may not be invested into directly.
Government bonds and Treasury bills are guaranteed by the US government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.
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.