The Recent Equities Slide: A Momentary Lapse Of Irrationality?

Aug. 12, 2014 12:04 PM ET1 Comment
Robbie Morrison profile picture
Robbie Morrison
60 Followers

Summary

  • U.S. equities continue to be richly valued.
  • Market is overlooking both economic and geopolitical Risks.
  • Investors would be wise to take profits on equity positions or hedge recent gains.

In a January investment note, we expressed caution towards U.S. equities, which at the time had been nearly five years into a bull market. Not that we expected a strong correction, much less a bear market, but it was unlikely that 2013's 29.6% gain in the S&P 500 would be anywhere near repeated. Through the first eight months of the year, that forecast has played out with the S&P up a more pedestrian 4.5%. We did not, however, expect the index arriving at this point by initially sliding nearly 6% before rallying 14% to a record high of 1,988. While the winter's dip at first appeared to be an outlier to the smooth upward trend (notice the nearly parallel lines of the moving averages below), the recent 2.8% retreat has again raised the eyebrows of more than a few cautious market participants.

At the time of January's note, we expressed the commonly held lament that while believing valuations had gotten ahead of themselves, there were few alternatives to maintaining current stock allocations given that cash returned zilch and the Fed was still gorging on Treasuries, keeping yields in unappealingly low territory. With this in mind, we suggested multiple options strategies that would lock in recent gains or take advantage of certain names and sectors that had lagged the broader market in 2013. These tactics (protective puts and purchasing calls) are still on the table. To this, we would add another possibility: trimming one's equities exposure. We all know the adage that nonprofessional investors make the cardinal errors of buying at the top and selling at the bottom. Consider this the ideal time to make amends for previous transgressions. This is not to say sell all stocks and run to the hills, but with valuations still elevated and economic data, while improving, still unable to reach the pace experienced prior to the 2008 financial crisis, one must consider the

This article was written by

Robbie Morrison profile picture
60 Followers
Investment analyst concentrating on (and working in) non-U.S. markets. Favors bottom-up fundamental analysis but recognizes the necessity to apply a robust macro-overlay given linkages of markets, myriad crises and dynamic global economic environment. Sector concentration has been on those attached to emerging market themes, namely the commodities space.

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