It should come as no surprise that I write about markets; you are, after all, reading one of my pieces now. In fact, between this and other places, I write two or three pieces a day. What this means is that I spend an inordinate amount of time hunting value. I look for things that are, for whatever reason, cheap, and have a chance of beating the broader market over the next couple of months. Usually it is a question of choosing between candidates. Over the last week or so, though, it has become increasingly difficult to even find candidates, and that has me worried.
Let’s be clear, nothing has changed to alter the long-term bullish stance that I outlined here and here and pretty much any time the market began to look a little nervous. Even with tapering, the Fed is still pursuing very loose monetary policy and, important in a global market, both the ECB and BOJ are doing the same. There is still a giant pool of cash chasing a return and US equities will continue to benefit.
I did, however, say at the beginning of the year that 2014 would see periods of volatility and end up with the S&P 500 about 8-10% higher than at the start of the year. A couple of things suggest to me that one of those periods of volatility may be approaching. The problem is, as I said above, nothing fundamental has changed, so any short term nervousness I feel now is just that, short term. Not only that, but it is also based on two things that many don’t trust, anecdotal evidence and a “feeling”. Twenty years in dealing rooms around the world, however, taught me not to ignore either one.
The anecdotal evidence is personal. As I said, I am increasingly having trouble finding trades that offer a good chance of a better return than the broader market. This could, of course be down to the fact that I need a vacation or one of any number of reasons unique to me; that is the problem with anecdotal evidence. It just seems that, from a sector perspective, there is nothing left to catch up. Tech and momentum stocks have bounced back from the sell-off, energy has fulfilled much of its potential and industrials have caught up. Even the perpetually underperforming financials were, when taken as a whole, one of the best performing sectors last year. Where’s the value?
Not just on a stock by stock or sector by sector basis, but also from a broader, overall stock market perspective, it is hard to see much opportunity.
The new highs that we keep seeing in the S&P don’t faze me, but the fact that, despite a week January, we are up around 7% year to date does. As we approach the half way point in the year, I have to believe that others will feel the same and, having made what they predicted for the year, start to trim equity exposure.
There is also the fact that, as I pointed out a few days ago, the Fed’s return to the question of exit fees for bond funds suggests to me that they are getting their ducks in a row before the language (at least) regarding rates begins to change. Any hint of a rate rise in the future will cause the kind of sell-off that I would rather be in front of.
When all is taken into account, then, I have a feeling in my (not insubstantial) gut that we are due a correction. If nothing else it may come out of boredom as we await the next earnings season and the dog days of summer stretch endlessly before traders. Long term investors should, as usual, ignore it. For those with a more active approach to their accounts, however, a reduction in exposure with a view to beginning to buy back on a pullback may be advisable.