Institutional Investors’ Risk of “Having to Be in Stocks” High
Tuesday, November 26th, 2013
By Mitchell Clark, B.Comm. for Profit Confidential
It’s an amazing performance that few people predicted at the beginning of the year—this stock market might just keep on climbing right into the New Year.
Just recently we looked at Automatic Data Processing, Inc. (ADP) as it broke a new all-time record high of $77.00 a share. Now, the position has surpassed $80.00 a share, still boasting a 2.4% dividend yield. It was $60.00 a share in January.
The stock market should have experienced a major correction this year, but it consolidated during the summer and reaccelerated instead.
The huge price movements of so many large and mature enterprises are not unusual in the historical performance of the stock market. In the middle of 1998, ADP was $30.00 a share (split adjusted). Two years later, the position hit a new, all-time record-high around $60.00 before correcting with technology stocks.
ADP and so many other positions illustrate the power that monetary policy has on the stock market’s business cycle. Clearly, equities today are overbought, but institutional investors have to be buyers, because investors don’t pay fees to have money sitting in cash.
While I feel that the stock market can close this year out strongly, generally speaking, I am not enthusiastic about investors buying this market. The fundamentals are slowly coming together to support the case for rising equity prices, but all the good news in terms of balance sheets and earnings outlooks are already priced into this market. Anything can happen going forward, but expectations for investment returns have to be extremely low if one is buying a stock market that’s already gone up.
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A profound and prolonged correction would be an ideal development in my view. It’s not that I’m rooting for losses; in fact, it’s quite the opposite. Speculative fervor, especially among initial public offerings (IPOs), seems to be at a peak and investors with money to be put to work need more value than is currently being offered. While there are all kinds of reasons why an investor would buy stocks at their all-time highs, investment risk is not reasonable considering potential returns at this time.
Institutional investors, for the most part, can’t really keep their funds in cash, but individual investors can do so. I think the stock market remains a hold, but new money can sit on the sidelines in anticipation of what I hope will be a significant correction.
If the catalyst for such a correction next year is a change in monetary policy, it would likely be an attractive buying opportunity.
I’m of the view that the stock market’s recent strong performance is representative of a breakout from its previous long-run cycle (2000 to 2012), and what’s transpired is the beginning of a secular bull market and a new business cycle.
As I wrote in April, if this is the beginning of a secular bull market, there will be spectacular declines within it. (See “Unbelievable Stock Market Now Destined for Greatness?”) As the stock market has shown so well historically, price inflation is what keeps the system going, but it is that same price inflation that is responsible for the bubbles and collapses.
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