The markets are testing key levels, and the next move could set the tone for the rest of the year.
I’m watching to see if the S&P 500 can break more meaningfully above its trend line from the January highs. If it can, I think it will present a great opportunity for investors to adjust their portfolios for what I think will continue to be a volatile year for stocks.
Yes, the stock market has seen a nice rally in the last week, but the S&P is still up less than 2 percent since the beginning of the year. It is also up less than 2 percent since earnings season began, even though first-quarter earnings are going to be up well over 20 percent! The inability of the stock market to rally in a more meaningful fashion in the face of great earnings raises a cautionary flag in our opinion.
Yes, the stock market could certainly rally back toward its January highs, but I think the reason it hasn’t been able to rally more strongly during this earnings season is because several key developments have changed the landscape since January (when the market was priced for perfection). We have concerns over trade wars, or at least increased tensions on that front), concerns over higher regulation on technology companies, a flatter yield curve, higher short-term rates and a Fed that is shrinking its balance sheet. In other words, we now have things that could offset the positive impact the tax bill will have toward future earnings.
These issues also raise the uncertainties in the marketplace. And markets hate uncertainty. Uncertainty also leads to an increase in volatility. Therefore, we believe that investors should consider rebalancing their portfolios a bit so they can take advantage of any pickup in this volatility. First, with short-term rates giving you yields above 2 percent, raising a small amount of cash is not a bad idea. (Let’s face it, Warren Buffett has over $100 billion in short-term bills.) This will give people some ammunition to buy stocks if we get another sharp downdraft like we saw in February.
Second, move some of your investments into stocks that not only pay a good dividend but also have a great record of growing their dividends at a consistent pace. These names will help you ride out this period of uncertainty and volatility, let you participate in any upside in the market, and pay you while you wait!
A great example is Exxon Mobil. This stock has lagged the rally in the oil stocks and the broad market. It was the subject of a bullish cover story last weekend in Barron’s, which highlighted the company’s plan to double its earnings by 2025 and the stock yields by 4.3 percent (more than twice the yield on the S&P 500).
This stock is now testing its 200-day moving average and its April highs. So if it can break meaningfully above those levels, it should gain the kind of momentum that will help it catch up to the rest of the group. So the upside potential is high even though it’s a conservative play.