While the risks of today’s low-volatility stock market are clear, we continue to believe the next sell-off in the broader market will be a correction, not the beginning of a new bear market. Look for a rotation out of the growth-oriented fare and into cyclical and value groups.
While the broader market looks strong on the surface, underlying trends have weakened considerably over the past six months. Accordingly, we believe a 5 to 10 percent pullback in the S&P 500 is likely in the final months of 2017. That correction will serve as an opportunity to add stocks to the Wealth Builders Portfolio.
The so-called FAANG stocks–Facebook, Amazon.com, Apple, Netflix and Alphabet–are up an average of 28.8 percent in 2017 compared to a 7.5 percent gain for the S&P 500. These large-cap names have paced the index’s gains so far this year. Should any or all of these stocks falter, the S&P 500 could quickly lose altitude.
With little sign the US is headed for recession by the middle of next year, there’s more upside for stocks this cycle. It’s dangerous to sell out too soon and miss out on the final months of the bull market.
Investor talk has turned against the Trump Trade, and for all the wrong reasons. While a market correction is due, look to the sectors that did well during the post-election period to perform well–making pullbacks an opportunity to buy.
Incoming data reinforce our take that the US economy has strengthened. But technical warning signs and policy concerns mean investors who invest in specific stocks and not the broader market have a better chance of outperforming.
The implications of the US economy moving into a period of stronger growth, faster inflation and rising rates shouldn’t be overlooked. And neither should the newest addition to the portfolio, an addition whose business goes from headwind to tailwind in this new environment.
This year will be a good year US equity investors, but only if you take an active approach. In that vein, we’re booking profits on one portfolio member and cutting another to hold–protecting profits as sentiment and growth shifts.
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