By The Sizemore Letter
In the event you are too busy to read a full article this morning, I’ll sum it up for you in one word: no.
Yes, the S&P 500 and Dow have backed off of their recent highs, and the recent slew of earnings announcements have been a little underwhelming. Goldmay be leading commodities into a full-blown bear market, which—given the correlation in recent years between all risky assets—is cause for concern. And when you throw in seasonal patterns—we’ve had great first quarters for the past three years followed by awful second quarters—plenty of investors would rather sell first and ask questions later.
If you are a nimble, short-term trader, it might make sense to take a little money off the table. And after a run like we’ve had, it’s never a bad idea to rebalance. But I think it’s far too soon to make major portfolio moves. Hear me out:
- The seasonal patterns of the past several years have mostly centered around Europe. It seems that springtime is when the Eurozone falls apart, and this year hasn’t been an exception. The Cyprus fiasco is just getting wrapped up, and Italy is still without a government. Yet bond yields continue to drift lower in the countries that matter most. Spanish yields are close to their lowest levels since late 2011, as are Italian yields. While I don’t consider the bond market omniscient, I do consider it more sophisticated than the stock market. And right now, the bond market is giving us all the right signals.
- The tight correlation between commodities and equities in recent years as part of the “risk on / risk off” trade is an anomaly. Yes, correlations are probably permanently higher than in years past due to the financialization of gold and other commodities via ETFs and other popular trading vehicles. But as the economy normalizes, “risk on / risk off” should give way to more normal relationships between asset classes. I recommend investors steer clear of gold, as I expect a lot of continued selling from hedge funds and large institutional investors (see “So Paulson…About that Gold Stash…”). But overall, I would not view gold’s breakdown of a sign of things to come for stocks.
- The conditions are not right for a major bear market. Stocks, though seeing inflows from retail investors, are still under-owned, and sentiment towards them has been lukewarm at best throughout this rally. Valuations, though based on record earnings that might be temporary, are not high by any credible measure, particularly given the low inflation and low interest rate environment. Dividend yields among many blue chips are better than what you can find in the bond market and only marginally more risky.
China is a worry, as is Japan. But at this time, I see no compelling reason to jump ship. For broad market exposure, I continue to like the Vanguard Dividend Appreciation ETF (NYSE:$VIG). For shorter-term tactical plays, I continue to like Spanish and French stocks, which can be bought via the iShares MSCI Spain (NYSE:$EWP) and iShares MSCI France (NYSE:$EWQ) ETFs.
Sizemore Capital has positions in EWP, EWQ and VIG. This article first appeared on TraderPlanet.
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