Ever since Janet Yellen, the new Chair of the Federal Reserve, made her first speech reiterating a stay-the-course policy regarding monetary policy, stocks got a whole new lease on their financial life.
This market is holding up extremely well, and the action proves that institutional investors will bid stocks if there is certainty. It’s a bull market characteristic. So long as Fed policy stays the course (which includes the tapering of quantitative easing) and there are no major external shocks, the “great reflation” should continue, if not more modestly than last year. (See “Making Sense of the U.S. Economy in 10 Short Points.”)
Fighting the Fed as an investor in stocks is typically not profitable. The current business and monetary cycles are going to change, but it’s not going to happen overnight.
The first quarter of 2014 is almost over and another earnings season is on the horizon. While quarterly earnings results are managed, after monetary policy, corporate numbers are the big news.
Playing a market that’s at an all-time high is extremely difficult. Price momentum can often surprise with its duration, especially in an environment of tremendous monetary ease.
But practically, it’s difficult to consider loading up on new positions after a five-year period of very respectable capital gains from the March low in 2009.
Optimism is a key attribute for any successful entrepreneur, and the expectation for positive outcomes is most certainly a real component of capital markets, especially with stocks.
My sense is that first-quarter earnings results will be quite lackluster, with domestic companies especially reflecting a tough winter.
Buying stocks is all about the future—a bet on a future stream of cash given current interest rates and the prospect for growth in bottom-line earnings.
I think it’s time for investors to consider lightening up on their more speculative holdings, particularly those stocks that are trading right near their highs. For the last two years, the best stocks have been existing winners (including blue chips), but the ride can’t last forever and portfolio risk management is a definite consideration.
With new cash, I’d mostly be sitting on the sidelines waiting for the marketplace to provide better value. A lot of stocks have started rolling over, and whether this is an indicator of an upcoming change in trend is indeterminate. This market is looking tired and long in the tooth. A “sell in May and go away” scenario is a very real possibility once again.
There is absolutely no need to rush into or chase any positions in this market. Investment risk is rising in the absence of a material correction in stocks and most good companies are priced at the high end of valuations.
Earnings season is always the best time to reevaluate your portfolio and this should include a full evaluation of investment risk.
The marketplace is forward-looking and big investors are likely to forgive poor first-quarter numbers if they are related to the hard winter weather. With this in mind, nobody ever went wrong booking profits from winning positions, especially those that are speculative plays.