This isn’t a time for investors to be greedy
There are going to be a lot of happy faces when investors open their upcoming quarterly investment statements because global markets have had an excellent start to the year.
If history provides any indication of what lies ahead, there will be even more smiles in April. The month has a positive bias for investors, with the S&P 500 being up 84 per cent of the time over the past 20 years, and the S&P/TSX composite index being up 74 per cent of the time, according to former BNN correspondent Frances Horodelski.
However, today’s market cap concentration in the top 10 per cent of the largest U.S. stocks has only occurred one other time in history and that was in 1929, according to a Deutsche Bank AG analysis. Just four stocks — Nvidia Corp., Microsoft Corp., Meta Platforms Inc. and Amazon. com Inc. — have accounted for 47 per cent of the gain in the S&P 500 so far in 2024, according to S&P Dow Jones Indices LLC senior index analyst Howard Silverblatt, as reported by Amber Kanwar on X, formerly known as Twitter.
Meanwhile, the S&P 500 is appearing a tad overextended, with its relative strength indicator now at its highest level since just prior to the 2020 COVID-19 correction, and its moving average convergence/ divergence (MACD) indicator is approaching new highs.
Anthony Crudele, a former S&P 500 pit trader and financial pundit, recently brought up an excellent point that we’re witnessing a market grinding sideways to higher, with volatility getting sucked out.
“In my 25 years as a day trader, I have seen a few environments like this, and they are the ones that typically start to weed out a lot of traders. Expectations start to get in their heads. They start to think too much. They start to trade too much, and eventually, the market bites them because they push too hard in a market that can’t be pushed,” he said on X.
“This is when you have to realize that small wins or small losses are your new reality (for now). When people talk about managing risk, it’s not just about managing it from one trade to the next; it’s about overall taking risk down or up in certain market conditions.”
Crudele offers some sage advice here. There are times to be greedy and this current market environment isn’t one of them. As he said, “trade small and be content with small wins or losses.” We couldn’t agree more that this is a time to go after base hits rather than swinging for home runs.
By no means are we saying this is the end of the bull market. Despite high valuations, we are starting to see the market backstopped by strong corporate earnings, especially south of the border last quarter.
Some may also be tempted when looking for new ideas to chase value in other areas of the global market such as Europe, given the valuation spread between it and the S&P 500.
However, you have to be careful even with this trade as Europe still has the potential to continue being the value trap it has been for the greater part of the past decade.
Instead of going all in on hopes that Europe will play catch-up, we purchased a structured note on the Euro Stoxx 50 (composed of 50 blue-chip stocks from 11 countries in the eurozone). While it isn’t a home run swing, it will pay our clients an attractive 7.6 per cent annualized coupon on a monthly basis as long as the index doesn’t fall more than 30 per cent.
There is also a 30 per cent downside barrier that offers some healthy protection should the note not get called away before its seven-year maturity. Therefore, we don’t really care if it underperforms and remains cheap or rockets higher since we get paid a nice return in either scenario.
To try to hit some doubles, we have been moving down the market in the energy sector since mid-cap producers are now trading at half the multiple of the dominating large caps. This space has been completely ignored: there remains little to no institutional interest and retail investors have run out of patience.
But again, we aren’t betting the farm, just adding a few dollars in a beaten-up segment that we think will do very well should oil prices remain anywhere near current levels during the rest of the year.
Martin Pelletier, CFA, is a senior portfolio manager at Wellington-Altus Private Counsel Inc., operating as TriVest Wealth Counsel, a private client and institutional investment firm specializing in discretionary risk-managed portfolios, investment audit/ oversight and advanced tax, estate and wealth planning.