The name February derives the Latin term "februum" -- or "purification" -- as the Romans performed a purification ritual each February somewhere between the 13th and 15th. Has the time come for purification on Wall Street?
Earnings have gotten markets to where they are, while ultra-loose monetary policy kept stocks in the ballgame -- providing the opportunity for synchronized growth across all of the world's major economies. And now, the Trump administration's fiscal policy is lending a hand in the form of lower U.S. taxes ( particularly corporate income taxes) and the willingness to take on increased deficit spending.
But what we're left to figure out is just what valuations are correct for stocks in this era. The one thing that's obvious is that historical valuations aren't useful.
Why is comparing 2018 valuations to historical ones like comparing apples and oranges? Simple:
- Monetary policy is different.
- Fiscal policy is different.
- There are far fewer publicly traded U.S. corporations than in the past, creating something of a scarcity effect. Many corporations have also bought back stock throughout the long-running U.S. economic recovery, making their shares scarce as well.
- Investment itself is different. Many people simply throw money at passive investments like mutual funds and ETFs, which are far less discerning than traditional stock pickers are.
What I Think Right Now
Is the U.S. stock market at the top? Wednesday's sell-off notwithstanding, I don't think so.
Though there will be days (or even weeks) where we're less sure of the market's direction, it's important to note that global stock markets saw record inflows just this past week. But what I do think we could see is a market that moves sideways for a little while as it digesting January's almost-parabolic move upward.
Do I think higher interest rates will hurt equities? Yes, eventually -- but with the exception of sectors that are highly sensitive to interest rates (known as "bond proxies"), I don't think a 2.7% yield on the 10-year U.S. Treasury note will do so. Talk to me when we wrestle with 3%.
In the meantime, let's take a glance at my book:
I'm going to remain long energy in February, and regular readers know that I'm a fan of Apache Corp. ( APA) and Schlumberger ( SLB) . I guess I'll throw General Electric ( GE) into that basket, as I have a feeling that I'm going to managing my GE position for a while.
I remain heavy on tech, and am trying to cover all of my bases here.
I want exposure to the semis, so I own Advanced Micro Devices AMD, Intel ( INTC) , Nvidia ( NVDA) , NXP Semiconductors ( NXPI) and Seagate Technology ( STX) . I'm also bullish on companies that service the semiconductor industry, so I hold Applied Materials ( AMAT) , KLA-Tencor ( KLAC) and Lam Research ( LRCX) . And I want exposure to the cloud, so I own Microsoft ( MSFT) and Oracle ( ORCL) .
Many of these names cover what I see as the key growth areas for tech -- artificial intelligence, autonomous vehicles, blockchain mining and machine learning. But I also own IBM ( IBM) to increase my exposure to these things even further. Additionally, I hold Activision Blizzard ( ATVI) to benefit from gaming.
And did I mention the FAANGs? Yeah, I'm still there. I own Amazon ( AMZN) , Apple ( AAPL) and Alphabet/Google ( GOOG) , ( GOOGL) . I also own Alibaba ( BABA) .
Elsewhere in the market, I've already increased my exposure to retailers this year. I own Kohl's ( KSS) , Macy's ( M) and Wal-Mart Stores ( WMT) .
And I know you're saying: "Sarge, you don't trade health care?" I do, but for the purpose of investment, I use ETFs.
Lastly, it's my belief that I also need exposure to:
- Defense stocks, particularly missile-and-fire-control plays like Lockheed Martin (LMT), which I recently boosted my stake in.
- Infrastructure-type plays, as President Trump tries to get the idea of a major federal infrastructure program off of the floor.
- Transports other than airlines.
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