Global equity markets continue to build on their strong start to the year and many averages are now at all-time highs. The sell-off to end last year now feels like it was a long time ago, as the fears that caused it have been dismissed. The biggest fear in the market these days is the fear of missing out (FOMO). Many investors who sold into the panic are now making the difficult decision between remaining on the sidelines or getting back in.
The speed of the bounce back is the primary concern we have been hearing. Many short-term indicators are flashing overbought signals. But with cash on the sidelines, dips are being bought, creating an environment where it will be difficult to get a correction. While markets are up over 20% from the lows of December, they are flat on a six-month basis, which might be lagging reality given the improved backdrop of low interest rates and lower trade risk.
Fundamentally, valuations shouldn’t be a concern as they are close to their long-term average. The risk earlier this year was that earnings could fall, meaning that positive market performance would need to come from multiple expansion. But from what we have seen so far from first quarter earnings, reports have been a little better than feared, on average. Barring a collapse in the second half, we shouldn’t be seeing an earnings recession anytime soon.
On a sentiment level, seeing the technology ‘unicorn’ companies, such as Lyft and Uber, finally completing or moving towards their long-awaited IPOs is a signal that greed is back. But that isn’t a reason to sell either. With the information technology sector leading markets higher, the window is open to get these sorts of deals done. The big question should be ‘if not now, when?.’ The rush to buy these deals is another sign that the cash on the sidelines looking to find a home. In what may be the new reality of a slow-growth world, US growth stocks are looking pretty good these days.
The key reason that investors should stay with this market is that the central bankers are dovish and ready to address any concerns markets may experience. Inflation is running below the targeted rate of 2% and doesn’t appear to be moving higher anytime soon, which means the Federal Reserve will keep financial conditions easy. You don’t fight the Fed and as long as they stay accommodative, risk assets should move higher.
Barring the risk of a global macro event causing an earnings recession, markets should have more runway. A straight line higher may be too much to ask but the President seems intent on stimulating the US economy ahead of the election, which remains over a year away. The pressure will be intense on the Fed to stay dovish.
We may start to see some sector rotation, as much of this move has come from a few large technology companies. Materials and financials should do better as global economies begin to recover. The energy sector also looks interesting for the balance of the year as share prices have dramatically lagged the underlying commodity performance. But given the memories of disappointments from the last few years, it may take longer for energy stocks to get going.
Will we get a ‘sell in May and go away’ scenario? It’s a nice rhyme, but it hasn’t worked in six of the last eight years. In the near-term, markets may be ahead of themselves and could see some volatility, but that should be seen as a buying opportunity. The two warning signals to watch for are a global recession or a hawkish Fed, both of which seem unlikely this year. While the sell-off last year may have increased anxiety and fear among investors, it could prove to be the reset we needed to set us up for a few more years of this bull market.
Ideas with Purpose
Purpose Premium Yield Fund (PYF) is built to churn out a stable yield with out of the money options. While this market environment seems primed to rotate towards value stocks, there’s still a sense of uncertainty and leadership remains narrow with big technology stocks doing a lot of the heavy lifting. PYF provides consistent income while adding diversification to your existing equity holdings.
Purpose Multi-Asset Income Fund (PINC) is also an income generator, but it uses exposure to a variety of asset classes, including options. With global central banks staying on the sidelines, investors continue to hunt for yield. PINC provides a variety of income streams with a large portion derived from more defensive dividend-paying stocks.
— Greg Taylor, CFA is the Chief Investment Officer of Purpose Investments
All data sourced from Bloomberg unless otherwise noted.
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