With world equity markets down for five consecutive days on high volume, investors are left to wonder: Is this an opportunity to buy all of those great stocks that “got away from you” in the first quarter run-up at attractive prices, or is it portent of nasty things to come?
It would appear to be a little of both.
Even before the five-day selling spree, stocks were reasonably priced compared to historical measures, and they were downright cheap when compared to bonds and other common asset classes. When you combine this with the generally gloomy sentiment towards stocks that has persisted for much of the past year, your risk of significant loss in a high-quality stock portfolio is almost nil.
Can stocks go from cheap to cheaper? Absolutely. It happens all the time. But the conditions for a real bear market are simply not in place. Fed policy remains loose, inflation remains largely tame, and stocks are cheap and under-owned by individual investors and professionals alike. These would be the conditions I would look for in a new bull market, not a bear market.
Still, after rising 28 percent from the 2011 Euro-crisis lows, stocks were due for a breather. After returning 12 percent in the first quarter, the S&P 500 had already exceeded the returns that most analysts expected for the entire year.
This is where that “nasty portent of things to come” comes into play. To borrow a quote from Lord Byron, it appears that the equity markets have “squandered their whole summer while ’twas May,” or more accurately April in this case. As a result, I expect the major indices to move sideways in a choppy, range-bound market for most of the second quarter or until the latest scare coming out of Europe subsides.
Given this, how are investors to position their portfolios?
In a range-bound market, you can make money in one of two ways. You either actively trade, attempting to buy at short-term lows and sell at short-term highs. Or, you can orient your portfolio towards dividend-paying sectors and simply collect your checks while waiting for prices to firm up. For the bulk of your nest egg, it is this second course of action I would recommend. This is the approach I have taken in my Tactical ETF Portfolio in holding the Wisdom Tree Large Cap Growth ETF (DLN) and the PowerShares International Dividend Achievers ETF (PID).
For more active trading, investors might consider a contrarian bet on Spain. I wrote favorably about Spain at the beginning of the quarter (see “Eurozone Member to Watch: Spain”), and I would reiterate this view today. Spain has some of the cheapest stock prices and highest dividend yields in the world today, and Spanish firms outside of the construction sector tend to get a significant percentage of their revenues from outside the crisis-wracked country.
Keep the faith, dear reader. There is money to be made in this market.