With the return of volatility to investment markets, I thought I’d give you a brief update on what I am looking at and looking for.
According to Mike Gibbs, Director of Portfolio and Technical Strategy at Raymond James: “Since the S&P 500 peaked at 2872 on January 26th, the S&P 500 has declined 8% (as of 3/23). During this period, the S&P 500 has moved 1% on a daily basis 18 of the 38 trading days, or 47% of the days. The volatility since late January is a far cry from the calm seen in 2017 when the S&P 500 produced a 32-year low for volatility with only 3.2% of the trading days producing a move of at least 1%.”
He cites headwinds from uncertainty on US trade policy, rising interest rates, and potential inflation as contributing to volatility. Despite these headwinds, Gibbs still sees a healthy backdrop for stocks. “Although some economic readings may have peaked, there is little evidence to suggest the global economy is at risk. In the U.S., economic conditions remain quite healthy, and even the Fed highlighted ‘the economic outlook has strengthened in recent months’ in the recent FOMC press release. Earnings growth is strong on a global basis as well. In the U.S., earnings growth is expected to reach the upper teens this year and the low teens next year. Valuations for U.S. equities, which at the January peak seemed stretched, are acceptable after the recent price decline. The 12-month forward PE of 16.5x for the S&P 500 at the close on 3/22 is near the average seen over the past five years.” I’ve provided a link to his article here: https://raymondjames.bluematrix.com/sellside
Personally, I think the stock market is favorably priced, and I have more stocks on my buy list now than I’ve had in quite a long time. Economic activity looks healthy, and a lot of greed has been washed out of the market recently. On the negative side, some liquidity measures have dried up a little bit, the Federal Reserve is tightening monetary policy, and we are headed into the seasonally weak period of the year (from May-October). I believe given that backdrop, buying stocks on pullbacks makes sense. I would continue to avoid interest rate sensitive sectors like real estate, utilities, and consumer staples, and lean toward technology, banks, and energy, which has had a nice breakout recently. For the first time in a while, buying stocks selectively, rather than through an index, might make more sense. Bonds might not be a great safe-haven, as their prices tend to move in the opposite direction of interest rates. So, if interest rates do rise, bond prices should go down. There are some interesting mutual funds of alternatives that could provide some stability, though.
As always, these recommendations are mine, and may or may not be the same as those of Raymond James. There is no assurance any of the trends mentioned will continue or forecasts will occur. Investing involves risk including the possible loss of capital. Asset allocation and diversification do not guarantee a profit nor protect against loss.
The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Individuals cannot invest directly in any index. Every investor’s situation is unique and you should consider your investment goals, risk tolerance, and time horizon before making any investment. The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Scott Mitchell and not necessarily those of Raymond James.
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