Stock market investors are stuck in neutral. Strong earnings and a decent jobs report didn’t move the needle. But if you want to be prepared for retirement, you can’t do nothing.
I haven’t done much stock buying recently, and when I do, I hold my nose and cringe a little. And I’m an investment adviser. I think all the market buyers who keep talking about the great values they’re picking up will eventually have to average down. Portfolio rebalancing and some bargain hunting — a nice way of saying I’m « averaging down » — is about it for me at this very moment.
I’m not alone.
Maybe Warren Buffett saying on Friday he bought 75 million more shares of Apple is enough for you. It isn’t for me, and if it also seems to you like investors are stuck in neutral, it’s because they literally are. They’ve been that way since mid-February, according to the Association of Individual Investors. Neutral sentiment — expectations that stock prices will stay essentially unchanged over the next six months — rose 3.8 percentage points to 41.4 percent in the most recent week. That marks the eleventh-consecutive week the neutral view has gone up, and it’s well above the historical average of just 31 percent.
A recent survey of investors who trade $1 million-plus brokerage accounts found a high level of individuals who expect no gain from the stock market this quarter. Sell in May and go away — a dubious investment strategy — seems to have arrived early this year.
The outflow of money from stock ETFs reinforces the story. The major averages, barely unchanged for 2018 so far, have been in a downtrend and bond ETFs, even as yields rise and every trader says sell, have been the hottest ETF investments. Six of the top 10 ETFs in new flows from investors in April were bond funds.
The plague of neutrality is creeping into everything — Friday’s closely watched nonfarm payroll report was more or less neutral, not too hot or cold.
The litany of reasons for the downtrend are numerous — geopolitical, political, inflation, and interest rates. But the fact of the matter is that uptrends and downtrends often persist without any particular reason. Even in the face of incredibly strong corporate earnings, stocks just can’t seem to hold onto any bounce.
The VIX, Wall Street’s fear gauge, isn’t particularly helpful now either. It’s currently at 16, above the recent trend of about 10, but well below the 50 it hit in February. The VIX’s long-term average is about 20. With all of the uncertainty, I could only surmise that corporate buybacks are countering ETF outflows, which have risen mightily since the passage of the Tax Cuts and Jobs Act of 2017. This has kept the VIX at a very moderate level. Meaning, it is simply reflecting the same stuck in neutral stance that investors are in.
Just because you can’t find a reason to buy any stocks doesn’t mean you don’t need a game plan. My experience tells me that markets don’t run on autopilot for long. You need to remain engaged with your portfolio. After last year’s stock market run, if I told you the S&P 500 is down less than 2 percent year-to-date, you probably wouldn’t think that was so bad, right? The worst thing to happen to investors this year, from a stock market perspective, was the rally in January. Now all stocks are measured against a brief moment of euphoria.
Here is what I recommend investors should do to get out of the thinking that they’re stuck in neutral — take a broader look at your portfolio and its purpose:
It has never been more important to own secular growth companies that are not dependent on external conditions. With little room for disappointing investors, companies that have potential to grow in any environment, secular growers, are getting harder to find but should play a more important role in one’s portfolio than in recent history. In my never-ending search for contrarian, down-trodden, and unloved stocks, I am attracted to a few underperforming sectors this year, mainly consumer staples, which is down double digits this year based on the performance of the Consumer Staples Select Sector SPDR ETF ( XLP).
One thing common in a downtrend is that even companies that report strong earnings still go down, or at the very least, don’t go up. But when the trend reverses, these are the companies that rally and lead the new bull market. They’re typically the ones that hold up best in a bear market.
Right now these stocks have been hit by the rising bond yields. They’re dividend payers and investors have sold them as bond yields have gone up. But interest-rate sensitivity as a sell on secular growth companies will reach its limit — I’m more confident saying this about consumer stocks than utilities. These are steady growers that have come down to much more reasonable valuations and have severely lagged technology stocks. The quality names in the group historically do not get cheap; just varying degrees of expensiveness. But that’s the price investors have always been willing to pay for steady Eddie fundamentals.
Just because investors, and maybe you are among them, are stuck in neutral, there is still plenty to do to make sure your portfolio is aligned with your goals and risk tolerance.
— By Mitch Goldberg, president of investment advisor ClientFirst Strategy
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