The S&P 500 closed down 2.45% today. We believe there is more downside to come but not a crash and not a systemic downturn in the market. Markets have remained too calm for too long. There needs to be a bit of an uptick in volatility and we are prepared to take advantage of this volatility.
As mentioned a few days ago, we have been selling stocks and raising cash in our managed accounts over the last few weeks. While we remain more invested than not, we have raised enough cash in managed accounts to feel well-positioned to take advantage of this weakness in the market.
We have been screening for stocks that we would like to own for clients at lower prices. Stocks in companies that we believe are going to be well-positioned to grow over the next several years is what we are seeking. Specifically, stocks in the financial, materials and industrial sectors is where we believe the best opportunities reside.
As anyone who has read our commentaries for any amount of time can attest, we place a high value on our read of market sentiment. Sentiment, despite the rally in stocks since the “Winter Swoon” of earlier this year, has remained disproportionately negative. This is a GOOD THING! After all, who will invest their hard-earned money when they have a negative view of the market? This is what leads to a high level of cash sitting on the sidelines of the market and, therefore, the number of sellers is low. With a limited number of sellers, the market sell off should be shallow and short in duration, we believe.
Importantly, what we are focused on are the positives in the market (since most are focused on the negatives). These positives include;
- low energy prices
- low interest rates
- elevated levels of cash on the balance sheet of companies and individuals
- reduced supply of stocks as a result of corporate buy-backs
- low unemployment
- rising wages
That the Federal Reserve will likely increase interest rates soon will weigh on stocks in the short term. Interest rates, we believe, have bottomed. This will set the stage for the strongest kind of market move. One in which the stock market moving higher at the same time interest rates and the dollar is rising. Whenever we have seen stocks go up at the same time the U.S. dollar and interest rates have risen it has meant the rally was long lasting. We expect this scenario to develop over the next twelve months.
So, expect further weakness in stocks over the short term. Know that we have raised cash in our managed accounts and continue to mine for attractive stocks to buy with this cash. Weakness will not turn into something more dramatic but will provide us the opportunity to re-deploy cash into high-quality stocks.
Kessler Investment Group, LLC