Mike Larson provides his analysis for investing in a bull market that is growing long in the tooth and showing signs of stress.
My taste in music is pretty eclectic. Modern and classic rock. You’ll find a little of everything on my various playlists. But yesterday morning, the song "If I Had a Million Dollars" came on and it got me thinking about the markets. Specifically, how I’d respond if an investor walked up to me and said: “I have a million bucks to invest. What should I buy?”
That’s an incredibly important question to ponder now because the stock market, the global economy, and several of my credit cycle indicators, are all at key make-or-break levels.
In stocks, the major averages are flirting with their old highs from January and September 2018. But only defensive, anti-recession sectors like utilities and Real Estate Investment Trusts (REITs) had hit new highs (until tech joined them this week). Financials, transports, and notably, the Russell 2000, remain far below their equivalent levels.
When it comes to the economy, growth is clearly slowing overseas. Some of the trade numbers are as bad as they’ve looked since the 2008-2009 recession, while important gauges of manufacturing activity are shrinking in several foreign economies.
Meanwhile, the International Monetary Fund (IMF) slashed its global economic outlook yesterday, the third time since October. It said worldwide growth could slow to 3.3% this year, the least since 2016, and added that “the possibility of further downward revisions is high, and the balance of risks remains skewed to the downside.”
And even though stock prices are making a run at the old highs, credit spreads remain well above their 2018 lows. Gold is also hanging in there, as are Treasury bond prices. All of that suggests worries about rising delinquencies and defaults are still lingering in the background.
That gets me back to the question from the outset: In this environment, what can you still buy with confidence? What kinds of stocks give you the potential for further gains, but also provide a comfortable margin of safety? Some “insurance” against the potential this is just another fake-out rally like we saw last summer?
I keep defaulting to “Safe Money” stocks, and for several rock-solid reasons:
1. They outperform in late-cycle environments like this one. That’s because investors realize their earnings are likely to hold up better than, say, industrials and transports as the economy heads south.
2. They offer more generous dividends and dividend yields. That’s especially true when you compare them to money-losing “flash in a pan” IPOs, or low-to-no-yield stocks in “growthier” sectors.
3. They operate in defensive businesses. Again, it’s all about who can still make money when the going gets tougher – like those global growth figures.
4. Many of these companies have been around for decades – surviving and thriving in expansion, recessions, and everything in between.
5. Many of these names also sport very attractive Weiss Ratings. That should help give you confidence in the underlying fundamental and technical health of these firms.
In short, if you were looking to put $1,000,000 to work right now, don’t get swept up in the hype and hoopla of a lot of the high-risk stocks Wall Street is peddling.
Focus instead on companies with lasting value, solid fundamentals, attractive Weiss Ratings, and a built-in margin of safety for today’s more-volatile, uncertain market and economic environment.
