Equity Flux: The Stock Market’s Latest Problem

Equity Flux: The Stock Market’s Latest ProblemBlue chips need a big retrenchment.

I never root for losses, but with equities having gone up so much, a correction would be beneficial from a technical perspective.

Action in the stock market and blue chips, specifically, has been spectacular this year. But it’s time for a break.

While history proves it’s not wise to fight the Fed or the ticker tape, the stock market is most definitely a leading indicator.

As a fan of dividend-paying blue chips, utilities and consumer staples are good multiyear investment themes. But being at their cyclical highs, I would not be a buyer right now. These stocks are frothy.

I think it’s probable this year that the U.S. economy will outperform other developed economies. I also see the formation of an equity universe, in which big investors are still buying blue chips.

Corporations do have to perform. But with excellent balance sheets among most blue chips, the stock market can finish the year higher than its current level (save for a shock).

The end of quantitative easing is slowly being priced into the stock market. While more news on the subject from the Fed would result in a sell-off, this is not an unexpected reality.

The one shock that this market is not ready for is a rise in short-term interest rates. This is a possibility, perhaps even by the end of this year, depending on economic news.

Long-term cycles are in a state of fluctuation. (See “Stock Market Fake-Out: Where Is the Retrenchment?”)

I remember Black Monday on October 19, 1987. It was an accident waiting to happen. The stock market crashed, lost a ton of money, then made it back in two years.

There was another financial crisis and recession. Inflation and higher interest rates were part of that picture. Then things took off—again.

Still, it is difficult to be bullish considering where the stock market just came from.

Blue chips are fully priced and the marketplace has placed its bet. Second-quarter earnings season must deliver tangible revenue and earnings growth or investors will bail.

A diminishment or the end to quantitative easing isn’t much of a worry from my perspective. It’s always best to leave the marketplace alone. But the short-term interest rate debate is going to heat up, especially if economic data pick up in the bottom half of the year.

So far, the action in blue chips makes sense. If you were going to be a buyer with all this fragility, investors bought the safest names.

The biggest surprise was that the stock market did not sell off on first-quarter earnings. And the fact that it didn’t increases the likelihood of a major near-term retrenchment.