Battipaglia: Still Cautious

03/29/2010 11:41 am EST


Joe Battipaglia

Market Strategist-Private Client Group, Stifel Nicolaus

Joe Battipaglia, market strategist-private client group for Stifel Nicolaus, tells why he's not so enthusiastic about the continuing market rally. The last time we saw each other, you were kind of cautious on this market. Are you still cautious?
Joe Battipaglia: We are very cautious about the market right now.

Q Why?
A There are some very short-term phenomena that we have to deal with. First is this whole deleveraging of the financial system with the consumers pulling back from debt, businesses are incurring new debt.

The second issue is that there is too much capacity, whether you look at the auto industry or the housing industry. Industries particularly that come back early in recoveries are not able to this time because there is too much capacity.

The third issue is that we have high joblessness, even though we are a year into recovery, and that might well be a condition we have for the rest of the year, so ultimately, what you get is less profitability, slower growth in the economy. You do get low interest rates but it is a stagnating situation, and that is usually not good for investment.

Q Did the rally off the March low surprise you?
A It did, and I guess what I did was underestimate the throwing around of several trillion dollars, whether it be through the Fed's purchases of mortgages and reserves to the banks or the Treasury department and the administration going with stimulus plans. They really are not stimulus plans. They are spending plans, but it does show up in GDP. The market interprets that as growth, and so they rally in the face of that, and I did not expect that to happen. I think now we are starting to pay for that.

Q What about all the money that is sitting on the side lines in money market accounts?
A Well, that speaks to defensiveness. That speaks to the fact that the public actually has been liquidating their equity portfolios month in and month out, and even though interest rates are essentially zero and the Federal Reserve has designed them to be zero to force people to take risk, it is not coming out of the bunker yet, and that tells me that there is still a great deal of skepticism out there.

Q: So, are you looking for a sell off in the stock market?
A Yes, and we have not had one since that March low, and I guess when you breathe a sigh of relief that the world did not come to an end, you can get a strong rally. We did get one of those in 1931 in fact during the Great Depression years and then of course it faded away in the ensuing couple years. We may see something similar to that-not as dramatic, but a market that moves sideways as opposed to going higher.

Q So, what type of asset allocation are you recommending then?
A For a balanced investor, they are roughly 68% in equities. There is another 27% or so in bonds and 5% in gold. The gold is there not as an inflation hedge but as a currency risk hedge.

Q: Thank you.

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