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We’re at yet another decision point, one of many over the past few years. And the stakes have never been higher.
That’s because we’re confronting an all-time high in equity indexes. We must decide what to do with our portfolio to best position them for the future.
The stock market typically discounts what it thinks the economy and corporate profits will do over the coming 12 to 18 months. And so many investors and market prognosticators have decided that leveling out here with the S&P 500 near 1,800 is appropriate for entering the New Year.
A recent poll showed that most investors expect little to no gains for 2014. Even the most bullish of Wall Street analysts are expecting little more than a 10 percent increase — and who can blame them? Earnings growth has trailed stock prices this year, so there are fewer fundamental reasons for shares to extend gains.
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| A recent poll showed that most investors expect little to no gains for 2014. |
That said, we have now come to the point where politicians are cooperating (a budget deal worked out and agreed to in the House is now working its way through the Senate), the Fed remains benign (even if the stage is set for a new Fed chairman to raise interest rates, accommodation seems set to continue in one form or another), and expectations for corporate profit growth are near zero for the next year or so.
As a stock-market bull, I could not dream up a more positive scenario for investors if I tried. The Ratings model is still kicking out hundreds of “buy”-rated stocks for consideration, and my own fundamental analysis continues to indicate near-term profit growth in the 20 percent to 30 percent range for select stocks.
Meantime, the benign (and getting more benign) governmental backdrop and improving tenor to the global economic recovery tells me that I’m on the right track in seeking pro-cyclical companies and themes for the year ahead.
While I acknowledge the risks laid bare in other columns, I remain confident that the strength of the underlying economy should continue to provide upward momentum to global equities. And I don’t think it’ll be necessary to look farther afield than our own American shore for companies with better-than-average profit prospects.
That’s why, despite anything coming out of Washington — political or monetary policy — nothing will be enough to sink the overall market, and we need to buy more exposure to sectors like financials, technology and materials in the immediate future. Yes, there will likely be a changing of the guard in the consumer-related sectors, in my view.
However, that switch is most likely to merely highlight higher-level industries like advertising and leisure over shopping and basics. But, overall, I don’t think anything has changed in the environment that would cause me to even rethink my current stance.
I won’t be publishing a weekly Money and Markets missive next week. So let me wish you a great day off. Keep watching for my evolving views in future issues.
Best wishes,
Don Lucek
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