It’s a difficult market to be a new investor right now. On the one hand, corporate earnings are coming in great, showing excellent profitability growth at both large-cap and small-cap companies. On the other hand, there’s the nagging worry about inflation and rising interest rates, and the reality of $70 per barrel of oil.
The fundamentals for companies are fairly robust, but the fundamentals of the economic landscape are slowly deteriorating. This means that caution is appropriate for individual speculators in stocks right now.
The stock market is showing a strong resilience to the negative influencing factors right now, and this may actually be a bad sign for the future. In previous columns, I wrote about the recent strength of stock prices and the market’s tendency to “forget” about the changing economic backdrop. It is almost as if the stock market wants to go up in value, no matter how high the price of oil goes.
This is dangerous behavior for an equity market, particularly when it is not properly discounting future expectations. So, a good dose of caution is needed over the next quarter of two. Investors need to be highly selective in the stocks they wish to buy. Now is the time to ride your existing winners, and slowly build some cash from any profitable positions. Now is the time to wait for the next cycle to begin.
The current economic landscape is making it difficult to justify taking on major new positions. It is difficult to buy low and sell high when the major market indices are at five-year highs. It isn’t the end of the world, but interest rates are still going up and commodity prices will continue to put pressure on inflation.
In this kind of environment, it is very easy to argue that only a commodity/resource fund will do.