Navigating the Equity Market
By Pamela Rosenau
May 30, 2012
Between now and the Greek election on June 17th, I expect we will see a consistent negative bias in the equity market. According to Citigroup global equity strategist Tobias Levkovich, “sentiment has shifted rapidly from complacency in March to panic in the latest readings” of their Panic/Euphoria Model. He adds that these readings are a contrary indicator, in addition to valuation metrics, arguing statistically that we may see market gains over the next two or three quarters. Although we may see some volatility prior to June 17th, I view this as a potential window of opportunity to add to both dividend paying stocks in defensive sectors, as well as energy infrastructure MLPs. Over the past month, investors have seen a dramatic underperformance in cyclical stocks as the economy has been slowing. The transport stocks have been carrying a signal of weaker demand in the economy, as industrials have been signaling weaker production. Although many strategists expect economic growth may be somewhat muted, we do not appear to be in a structural downturn. BlackRock CEO Larry Fink recently stated that “these are scary times and because these are scary times, it is a good level to enter into long-term investments,” as he favors dividend stocks, especially of multinational companies. As blue chip names have corrected by approximately five percent from recent highs and energy infrastructure MLPs have corrected by nearly eight percent since highs in February, I anticipate that any potential volatility will provide for a profitable investment opportunity.
Although this is no longer the consensus view, I believe it is quite probable that Greece remains a part of the Euro and will ultimately get rewarded by the European Central Bank, which will reduce rates and take other easing measures. As a result of this reassurance by the ECB, I expect the Euro will rally and the U.S. dollar will sell off. GaveKal recently stated that even if Greece does not remain in the Euro, the ECB will most likely take steps to provide some market stability. For example, the ECB may not only ease monetarily by cutting rates, but may also guarantee bank deposits in euros in order to stem capital outflows. GaveKal also adds that “the creation of a pan-EU government bond” could also provide support and would be viewed favorably by the market. Essentially, whether Greece leaves the Euro or not, the most important factors are the actions of the monetary authorities. Overall, the ECB, Fed, and China should be expected to lower rates in order to stimulate a stagnant global economy. This expected monetary easing combined with a government in the U.S. that will want to avoid any dramatic impact of a fiscal cliff, should be bullish for the stock market in the coming quarters. As I expect a market rally up to the U.S. election in November, we may then be able to “lighten up” should the market become too “frothy.” In the meantime, the largest multinationals continue to take advantage of attractive capital markets and record low yields by issuing debt cheaply in order to support their organic and acquisition growth plans, as well as repurchase stock. When companies institute debt financed share repurchase plans, I often view this as a bullish sign to look for attractive opportunities in the stock market. After all, as the ancient sage Zenrin stated, “If you wish to know the road up the mountain, ask the man who goes back and forth on it.”
Pamela Rosenau is Managing Director & Equity Market Strategist at HighTower; Co-Chair of the Steering Committee of HighTower Group Investment Solutions; and Chief Investment Officer of the Rosenau/Paul Group.
Ms. Rosenau is an expert at managing equity portfolios in the large cap core domain, and a generalist in terms of sector/stock specific analysis. She is a macro, visionary, non-consensus thinker that places an emphasis on risk minimization and misunderstood market moving signals. With over 25 years of experience in the financial industry, her tenure in investment management is best reflected in her significant outperformance in down markets. Prior to joining HighTower she worked for UBS for four years as well as Citigroup Smith Barney and Wertheim & Co./Schroders Plc. She was recently ranked by Barron’s as one of the “Top 1000 Financial Advisors” and “Top 100 Women Financial Advisors”, and has been listed by Research magazine as one of the “Top 10 Ranked Women Advisors in America” (2003), and by Money magazine as one of the “10 All-Star Brokers” (1996, 1997).
Rosenau/Paul is a team of investment professionals registered with HighTower Securities, LLC, member FINRA, MSRB and SIPC & HighTower Advisors, LLC, a registered investment advisor with the SEC. All securities are offered through HighTower Securities, LLC and advisory services are offered through HighTower Advisors, LLC.
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