4/1/2014 2:45 PM ET|
Time to cash in some chips?
With US stocks looking expensive, investors should sell some of their pricier shares and start building a stash of cash to exploit the next downturn, analysts say.
Like the old song goes: "You've got to know when to hold 'em . . . know when to walk away . . ."
Even as investors are celebrating the bull market's five-year anniversary -- the Dow Jones Industrial Average($INDU) has risen 149 percent since its March 9, 2009, financial-crisis bottom -- there's a growing sense among some Wall Street pros that it's time to slow down.
While the market could keep rising for the foreseeable future, cashing in some chips by selling select shares and being cautious about new investments likely is a wise move, some analysts and investors say.
Last month, the Dow rose 1.1 percent, while the S&P 500 ($INX) stock index rose 1 percent.
The Dow, which set an all-time record on Dec. 31, has had a mixed first quarter. After a selloff in January, it has clawed back and is now almost back to its high. The S&P, meanwhile, is down just 0.3 percent from its all-time high set on March 7 of this year (and up 176 percent from its 2009 low).
But at these levels, stocks no longer are cheap. The S&P 500 now trades at about 16.5 times its earnings over the past 12 months and about 15.4 times expected earnings over the next 12 months. That compares with a 10-year average price/earnings ratio of 14.7 based on the past 12 months' earnings, and 13.9 based on expected earnings over the next 12 months. A year ago, the figures were 14.3 and 13.5, respectively.
In other words, stocks have entered expensive territory. The market's P/E ratio is about the same as when stocks peaked in October 2007.
The market isn't cheap based on other valuation metrics, either. The S&P's gains since it reached lows in early 2009 nearly match the 180 percent gains of the average performance of bull markets going back to 1921, and are above the 115 percent median gains of bull markets in that period, suggesting there may not be huge additional gains ahead.
If the current bull market matches the average of bull markets past, it would have about five weeks left to run.
"Sentiment has moved into a danger zone," says Doug Ramsey, chief investment officer at Leuthold Group. The investment firm's weekly sampling of 30 investor-psychology measures finds sentiment has moved to a three-year optimistic extreme. The last time it found a comparable reading the market dropped almost 20 percent.
Douglas Kass of Seabreeze Partners Management says he's concerned about "speculative excesses," such as a revived market for initial public offerings and soaring biotech and tech stocks. Indeed, even after a sell-off in the last month, shares of electric-car maker Tesla (TSLA) are up almost 400 percent over the past year and still trade at more than 56 times their expected earnings over the next year.
There are other reasons for concern. China's economy is showing signs of weakening to its slowest pace in a decade. A highly indebted real-estate developer recently collapsed amid a slowdown in the country's once-raging property sector.
Meanwhile, the price of copper -- often seen as such an accurate barometer of global economic strength that it's gained the nickname "Dr. Copper " -- has been falling. Copper is down about 13 percent this year to its lowest levels in about four years. Other raw materials, like iron ore, aluminum, lead and zinc, also have fallen. China is the biggest consumer of many of these materials.
At the same time, U.S. mortgage rates are rising. Thirty-year rates are at about 4 percent, up from just over 3 percent a year ago, as investors exit bonds in anticipation of reduced bond-buying by the Federal Reserve.
Consumers face other challenges, including rising food prices, partly due to drought conditions in parts of the country. Consumers usually get a boost around this time in a recovery, as wages begin to rise. But there's little sign of a sustained wage rebound.
"Pricing power is almost completely absent from core sectors, and downward pricing pressure prevails in many such sectors," says Daniel Alpert, founder of Westwood Capital. "That would tend to be adverse to earnings and the high market multiples we have seen lately."
"The reason that so many are on the fence about this is that earnings per share can be, and are being, highly engineered via share buybacks," Alpert says. Earnings per share can rise if shares are purchased by companies, reducing the number of shares outstanding. "And as long as companies have high levels of cash with which to effectuate such buybacks, the pain of top-line pressure may be blunted for a time. But this environment is not a sustainable one or evidencing a healthy real economy," he says.
It's likely too soon to dump shares en masse. When bull markets reach the five-year mark, they've historically climbed another 26 percent, according to S&P Capital IQ, as long as they survive another year.
Some see evidence the economy is gaining traction, which could help. Veteran investor Jeremy Grantham argues that the market is as much as 65 percent overpriced but likely will continue going up until it reaches a real danger zone.
Indeed, until the Federal Reserve begins raising interest rates, the market could maintain its strength. And some bearish investors, such as Kass, were skeptical last year as well, a stance that proved folly as the S&P 500 climbed 30 percent.
Still, at current levels for stocks, investors don't have the same margin of safety they once had. That's what some well-respected investors, such as hedge-fund manager Seth Klarman, who runs Boston-based Baupost Group, have warned about in recent weeks.
So what should investors do? Rather than sell all their shares, better to start building a stash of cash to exploit the next downturn, analysts say. It also makes sense to look for expensive stocks to sell.
Blaze Tankersley, senior managing director at Baycrest Partners, says investors should be cautious if they can't use a 20 percent downturn in the market as a buying opportunity and even more cautious if they hold more-speculative shares.
Tobias Levkovich, chief U.S. equity strategist at Citigroup (C), says weakness in consumer stocks will continue, noting recent revisions in analysts' earnings estimates. Retail and media stocks are especially unappealing, says Citigroup. Levkovich says consumer stocks are be an area investors should consider trimming.
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If Not Now Then When:
A 20% drop in the DOW would be a breath of fresh air..
A 60% drop in the DOW would be a healthy adjustment.
DO NOT CASH OUT YOUR CHIPS.
THIS OBAMA BULL MARKET CANNOT BE STOPPED!
GO SCHD (Charles Schwab High Dividend ETF) and Blackstone (BX) for dividend growth and stock price growth because the global picture is improving and for the first time our enemies see war as weakness and self-injury, not as a winning strategy. Give peace a chance!
The stock market will continue to go up because it is reacting to positive reinforcement from a very progressive President and an MIT-trained turn-around team. IMAGINE where we would be if we didn't have a do-nothing Tea Party-controlled Congress getting paid by the taxpayers to HOLD US BACK. We suffered 8 years of these morons trying to attach abortion bills to every piece of legislation as extortion then simply not showing up when they didn't get their way. I will never vote GOP again. GOP supporters keep hoping by writing this fluff that we will have a huge correction so they can profit for the first time since they ignored all the other rallies out of racial hatred and ignorance. We're up 180 percent since President Obama guided us out of the abyss of pointless warfare caused by Congress being embedded with oil companies. It's too late now for a correction scenario, losers, because we are going to progress to the point where the American people see you for what you are - sore losers and repressive ancient artifacts who are no longer considered relevant or leaders by the American public. Don't bother to show up, just go away GOP. Dow 20,000 with or without you!!! God Bless America and our President!!!
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