There is a lot of liquidity out there, and all kinds of stocks are experiencing significant price momentum.
It’s a bull market still, and no matter how long it has to run, it seems that valuations aren’t as important as owning the right stocks for institutional investors. Countless names have fought back in price from recent sell-offs and are now pushing new record-highs once again.
These stocks include Netflix, Inc. (NFLX), priceline.com Incorporated (PCLN), and Google Inc. (GOOG), among others. You could buy a basket of these stocks and if nothing were to change in terms of monetary policy, they probably would be higher in a month’s time.
But while momentum remains strong and existing winners keep outperforming, stocks haven’t really experienced a material price correction in more than two years and because of this, investment risk remains high.
Previously in these pages, we looked at some top-ranked biotechnology stocks that continue to be tremendous wealth creators for shareholders. (See “Can the Rally in Biotechs Keep Its Momentum?”) But their amazing price-performance also illustrates the froth in the stock market. While speculative fervor for initial public offerings (IPOs) has diminished since the beginning of the year, existing winners just keep on plowing higher.
Investor sentiment can always change on a dime, but it needs a catalyst to do so. This could include a change in monetary or fiscal policies, a geopolitical event, a derivatives trade gone bad, currency destabilization—the list is endless.
The Federal Reserve recently gave the marketplace the certainty it was looking for: quantitative easing is going to continue to be reduced and short-term interest rates are going to stay the same for the foreseeable future. Combined with very strong balance sheets, especially among large-caps, these are still powerful fundamentals for equity securities.
The current environment is a very opportune time to make wish lists of the great stocks you’d like to own if they were better priced. This is still a market that is favoring existing winners, and it applies to market capitalizations from blue chips down to the small-caps.
If earnings over the last several quarters were modest, they were still solid, and there wasn’t much of a sell-off, even if companies didn’t beat Wall Street consensus.
There is still an underlying strength to stocks, and there’s plenty of liquidity and cash on the sidelines for share prices to go higher. But realistically, a material price correction would be a healthy development for the longer-term trend.
Given current monetary policy and corporate outlooks, a material price correction would likely be an attractive buying opportunity. Although the interest rate cycle is going to change relatively soon, interest rates are so low right now that there’s room for them to go up and not shock the system too badly.
The most valuable information for equity investors after monetary policy certainty is what corporations report and forecast for their businesses. Countless form 10-Ks are available now and they offer up all kinds of interesting tidbits regarding corporate business conditions, especially from multinationals.
Countless stocks trading at their highs are very overvalued. But real double-digit growth is a tough thing to come by, and big investors will still bid the market’s existing winners exactly because they are momentum trades.