Analysis and outlook for the equity market
- Upside momentum in the S&P 500 has come to a grinding halt in recent weeks as stocks trade just above levels that we would consider to be “fair value“ for this point in time.
What it may mean for investors
- We continue to believe stocks will likely not trade meaningfully higher than the recent record high. We feel the second half fade we have been expecting will likely begin over the next few months.
The phone has been ringing quite a bit more over the course of the last few months as the S&P 500 has notched a series of new record highs. Financial Advisors and their clients want to know what to do with new money they have earmarked for investment in the stock market. Should they jump in all at once? Should they dollar cost average by investing some every month over the next year? Should they wait for a pullback?
There are a number of methods and theories out there that suggest a variety of ways to put new money or sidelined funds to work in equities. Which path you choose has a lot to do with your investing time horizon and your ability to brush off potentially adverse near-term volatility. This is especially true given the stock market’s recent stall over the last several weeks just below all-time record highs.
Before this strategist gives you his two cents on the topic, it might be of value to pass along a little background. First, yours truly is not an all-or-nothing kind of guy. A more measured approach is my normal path of action. Investors should try to capture that same mindset when looking to invest new money in the stock market. From the mid-1980s into the late-1990s, I did battle in the trenches of the foreign exchange markets on a day-to-day basis as a trader and market maker. This experience drilled deep into my psyche the concept that jumping into the market with everything you have is usually not the best plan. This strategy is tricky at best in most market environments. That is why thinking in terms of thirds can be helpful.
What that means is breaking up the total amount of funds into three equal portions. Right now, in our opinion, the S&P 500 is at or just barely above what we would consider “fair value” for this point in time. If that is the case, we would recommend investing one-third of the total funds in the market now—as in today. Our outlook has called for the S&P 500 to hit its annual high in the middle portion of the year at or just a bit above the top end of our year-end 2230-2330 target range. If we are wrong and the index goes higher, at least a portion of the money would be invested. We are now trading a bit above the top end of that range.
Our analysis suggests it is likely the S&P 500 rally will fade in the second half of this year as concerns over wage inflation in 2018 and possible Fed rate action may create equity headwinds. If the index does that, the next step would be to look to get the remaining two-thirds of the funds invested as the market corrects. Just inside the top end of our target range might be a spot to put another third to work. And with the final third, consider investing at a level toward the bottom end of our target range.
This strategist will not be able to pick the exact bottom of any pullback. We are not calling for an end to the cycle. But be ready; there may be opportunities to invest at better levels in coming months.