Countless stocks are bouncing off their highs and in many cases, a lot of these companies are due for share splits.
It’s a peculiar environment for investors in that the main market indices are right at their highs, yet the main-street economy isn’t performing anywhere near as well.
Stocks are a leading indicator and share prices move in advance of anticipated corporate earnings, but it’s so difficult to be a buyer when most stocks have already gone up like they have. It’s no boom time at all in the real world.
So with this backdrop, I think it’s fair to conclude that an investor has to be extremely careful in the current environment.
I view investment risk in equities as substantial because stocks are at their highs and Main Street is stagnant. It’s not a good combination. And with the real possibility of rising interest rates later this year or early 2015, the boom that hasn’t happened could easily turn into a bust.
For an investor looking to buy stocks right now, I would say to wait until second-quarter reporting season begins and we get the latest numbers from corporations before investing.
This market is so badly due for a material price correction, and with the right catalyst, it could happen near-term.
Buying Opportunity
Given the current environment, I view such a price correction as a buying opportunity. A real stock-market correction has eluded us for too long since the low of March 2009.
And while there was a small sell-off at the beginning of this year, stocks have been moving consistently higher for two straight years.
I don’t see anything wrong with investors sitting on some cash at this time. And if earnings come in on the lighter side this upcoming reporting season, it might prompt a lot of investors to take some money off the table, even among dividend-paying blue chips. (See “Eight ‘Super Stocks’ for a Slow-Growth Market.”)
For the most part, I look at brand-name stocks as currently being fully -- but not -- overpriced. Earnings-growth expectations are modest for this year, but companies often low-ball their full-year outlooks, making it easier to “outperform” Wall Street's consensus.
Find Value
As a buyer in today's market, I’m a believer in existing winners as I try to buy value to the extent that it’s possible to find.
The energy infrastructure, for example, is one sector where you can find higher yields and better value relative to the broader market.
On the cusp of another earnings season, I would be sitting on the sidelines waiting for the numbers, instead of speculating with new positions.
The Interest-Rate factor
Investment risk is high, stocks haven’t had a real correction in years and the interest-rate cycle is soon going to change.
While I do think this market can handle some monetary policy tightening, the Federal Reserve may turn out to be the only catalyst for a correction this year. It would be a well-deserved eventuality to a market that’s been running strong for five full years.