His view is that, with declining earnings expectations for the bottom half of the year combined with mostly zero top-line growth, the likelihood of reduced monetary stimulus and lackluster global growth do not warrant a rising stock market. The market’s expectation for an improving U.S. economy is already priced into share prices.
But while this market strategist makes a very good case for taking profits in U.S. blue chips, there still isn’t anywhere else for most investors to go other than the stock market. This gentleman thinks that a rising cash position is warranted and that the cash can then be put to work in the next correction and/or recession.
Cash in the bank is always a good thing, but there is an “opportunity cost” to not being in the stock market’s best positions. (See “This Star Pharma Company Delivers the Goods Once Again.”)
From my own perspective, I find it difficult taking profits in blue chips like Johnson & Johnson (NYSE:JNJ) with a current price-to-earnings ratio of around 20 and a 2.9% dividend yield. With an earnings plus dividend growth rate of approximately 10% over the next 12 months, JNJ to me is a big “Hold.”
And there are many other blue chips that I wouldn’t sell either, even though they have done extremely well on the stock market recently.
Realistically, I come back to the old adage that it usually doesn’t pay to fight the Fed. With a change in monetary policy somewhat likely this September, the Fed’s actions will be the catalyst for correction, even though the stock market’s been due for a correction for months now.
The perception of certainty is a Wall Street staple, and that’s what the central bank has provided to date. Monetary policy, at least in the near-term trading action, always overrides the marketplace’s real financial metrics. Second-quarter earnings and revenue growth among blue chips was mediocre, at best.