It has not been a great start for investors in 2016, to put it mildly. What had been a stealth bear market (energy, commodities, small caps, emerging markets, etc..) in 2015 has turned into something much larger and that has negatively impacted the main equity indices to begin the New Year. Unless we rally substantially over the next week or so, January will go down as the worst month for share performance since February 2009. This was just before equities found a floor after the 2008/early 2009 debacle in the market and economy.
However, equities do appear oversold in some sectors. In addition, we got positive manufacturing readings for January this morning. December existing home sales also came in much higher than expected. Not surprisingly we are getting a broad based rally in early trading Friday. Industrials and Manufacturing are particularly strong given these positive economic reports. Let's see if investors have the confidence to not sell the rally before the upcoming weekend.
I still think the main play in this market is to continue to deploy "dry powder" primarily to large cap stocks with reasonable valuations and that should be able to show revenue and earnings growth in 2016 despite the challenge global backdrop. These companies should have rock solid balance sheets and large dividend yields which should prevent them from seeing significant further declines even if the market remains rocky for a while. I highlighted five of these picks earlier in the week.
Until we get stabilization in the high yield credit markets, I would not venture out on the risk curve like into small caps to any major extent. As I said yesterday, what is happening in the "junk bond" space is the most important indicator right now to which way the market heads from here. Watch it closely.
I also think the battered hotel & hospitality real estate investment trust space looks like a major buy right here if you believe the United States will avoid a major recession. Some of these stocks have been taken down 30% to 40% from 52 week highs, are cheap and yield between 6% to 9% currently. I outlined some of my favorite plays in this sector of the market this morning.
Finally, large cap biotechs looks like they have bottomed. There are some great values here at the moment including AbbVie (ABBV), Gilead Sciences (GILD) and Celgene (CELG). This is also one of few industries that will show solid sales and profit growth in 2016. Yet many of these large cap growth names are valued at significantly below the overall market multiple, which is a rarity. In addition, look for better than expected quarterly results when Amgen (AMGN) and Biogen (BIIB) kick off the earnings parade next week.
That is my quick take on this last trading day of the week. Hopefully the markets are at or near the bottom and we will be able to keep our rally caps on for more than an hour or two at a time in the weeks ahead.
Thank You & Happy Hunting
Bret Jensen
Founder, Biotech Forum