Most investors I’ve spoken to recently are frustrated — frustrated that the markets can’t seem to make much progress so far this year, and the explanations given for the stagnation are also frustrating to my small survey.
The main reason given for the lack of progress is that the market is simply digesting its gains from last year, when the S&P 500 was up 30 percent after so many years of unexciting action. That may be true — I don’t know for sure — but I’m not really swayed by that argument.
Because the market is above all a discounting mechanism. That means that it is putting current values on assets (in this case, stocks) based on the expectation of a certain level of profits in the future. For me, that’s why in the last half of February we are pretty much right back where we started the year.
|The Ratings Model is showing continued strength in consumer stocks.|
Economic releases have been coming in lukewarm, and earnings season — even if it wasn’t terrible, wasn’t great, either. The pullback we witnessed in late January was led by some downbeat earnings reports and uninspiring corporate profit outlooks.
That makes sense to me, but then what is the market telling us?
I think it’s merely telling us that even if the market was “right” in 2013 (bidding up to account for expected future trajectories in profits), 2014 and beyond are becoming question marks as far as profit is concerned.
For short-term traders, this environment is perfect for trades in stocks that are expected to move based on short-term news flow (like earnings news, or economic report releases). But what does a long-term investor, including me, do when the picture looks this cloudy?
My answer to that question is always the same: Keep your eye on the future. Yes, some outside threat to the larger economy may emerge at any time. But that’s nothing new. The market has always been, and will always be, susceptible to gyrations based on threats from abroad or by some new fear at home.
What we need to do as investors is to position as best we can for outperformance — whether that means buying particular stocks, industries or whole sectors — and use a disciplined approach to do so.
My discipline comes from my adherence to the Weiss Ratings Model. And that gives me confidence to buy on pullbacks like we saw recently, and to hold on even when the picture starts to look bleak. What I’ve seen so far in 2014 in the Ratings Model results is a continued strength in some of last year’s winners — financials and consumer stocks. For example, Bunge Ltd. (BG) has been upgraded to a buy from a hold. And some marked deterioration in others — select issues in energy, such as Apache Corp. (APA), have been falling in terms of ratings. Others in that sector are hanging in there, but there’s no real trend.
We’re just near the end of earnings season now, and I don’t see any reason in the numbers to cut and run. In fact, I still think we’ll end the year about 10 percent higher than where we started, but I also believe that may be a little conservative given the resilience we’ve seen in early 2014.
I’m reviewing the latest results right now, and hope to have another sector to highlight in my column next week. For now, I’d say that discipline and an eye on the future is paramount to success, and that the daily “random walk” is nothing out of the ordinary.