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Cashing In Some Gains Now Isn't Such a Bad Idea

Cashing In Some Gains Now Isn't Such a Bad Idea
(Woo Bing Siew/Dreamstime)

By    |   Wednesday, 24 April 2019 01:58 PM

The S&P 500 and the Nasdaq have posted new all-time closing highs, which is of course noteworthy.

Of course, there is no guarantee whatsoever that this rally will continue notwithstanding that over the short term at least, there are no indications that a deep market correction is imminent.

Using history as a guide and going back to the early 1950s, we see that every time the S&P 500 set a new record high, the average return over the next 6 months has been about 4.25 percent. Large falls after the S&P 500 had reached a new all-time peak only have occurred in about 10 percent of the cases when the index fell more than 5 percent during the following 5 months. 

Besides that, the price/earnings ratio for the S&P 500 is currently 18.1x, compared with the 20-year average of 18.3x.

After the market’s sharp correction at the end of last year and the Federal Reserve’s U-turn to what it calls its “patient” stance on its interest rate policy, and when we consider that together with the potential, at least in part, of a resolution to the U.S.-China trade tensions, we got the right mix for the U.S. equity markets to move nicely higher to new record levels for the S&P 500 as well as the Nasdaq. Stocks should still cllim despite the dire predictions of the IMF, the World Bank, the OECD, and so on, of a more or less synchronized global economic slowdown to continue. 

Does this all mean that an investor in U.S. equities could engage or stay engaged in full, at least for the time being, the answer isn't straightforward.

It’s a fact that U.S. stocks that have actually a forward P/E of 16.9x, which is in the context of the U.S. market an acceptable risk level.

Now, as an investor when you compare “global” equities to the U.S. stocks’ levels that are actually trading at a 13 percent “premium” over global equities and 4 percent above the 10-year average of global equities compared to U.S. equities, for the long-term investor serious “food for thought” arises.

One of the big questions is “if” the “divergence” between the U.S. equities and the global equities will continue over the median to longer term on the path where it is on for now?

Also, will global economic growth finally start to stabilize?

Please don’t get me wrong. I’m trying to be as realistic as possible. I’m surely not suggesting that we are closing in on a collapse of the U.S. equity markets, but I expect some downward adjustments further down the road, albeit not dramatically for now, but I’m not convinced of the same over the median and certainly not over to the longer term.

Investors should keep in mind that the U.S. economy has not become immune to internal as external shocks. Therefore, I think, cashing in some gains isn't such a bad idea.

In an interview he gave last week to the Wall Street Journal, Robert Kaplan, president of the Dallas Fed and who will be FOMC voting member in 2020, said “Triple-B debt has tripled over the last 10 years. Leveraged loans have doubled. There’s substantial increase in corporate leverage. Low interest rates and in particular our accommodation is not free. It can create excesses and imbalances. This high level of corporate debt I don’t think is going to be a systemic risk at this point, but I do believe it is likely to be an amplifier if we have some slowdown in the economy – i.e., businesses if they’re more leveraged are going to be more likely to restrict capex and hiring rates are historically low.”

In the context of all this, the Congressional Budget Office released on Monday its latest update for the 2019 Budget and Economic Outlook wherein it projects the federal budget deficit to be at about $900 billion for this year and to exceed $1 trillion each year as from 2022 on.

“Real” GDP is projected to grow by 2.3 percent in 2019, down from 3.1 percent in 2018, as the effects of the 2017 tax act on the growth of business investment wane and federal purchases, as projected under current law, decline sharply in the fourth quarter of 2019 while output in 2019 is projected to grow slightly faster than its maximum sustainable level, continuing to boost the demand for labor and to push down the unemployment rate.

After 2019, annual economic growth is projected to slow further to an average of 1.7 percent through 2023.

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.

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The S&P 500 and the Nasdaq have posted new all-time closing highs, which is of course noteworthy.Of course, there is no guarantee whatsoever that this rally will continue notwithstanding that over the short term at least, there are no indications that a deep market...
cashing, gains, market, high, investors
Wednesday, 24 April 2019 01:58 PM
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