Catching Its Breath

After a 6 week-long advance, the S&P 500 finally paused just below record highs. As it sits today, the market is up roughly 25% on the year and is up roughly 8% from the early October low. With that backdrop, moderate consolidation is in some ways welcome. A steady grind higher is preferable to a parabolic move. The market remains on solid technical footing and the fundamental outlook continues to improve. The sentiment isn’t overly bullish and a lot of cash remains on the sideline. We’re seeing early signs of this cash moving into equities, but for sustainability sake, we’d like this to be a gradual shift vs. a flood.

Cash has built up on the sidelines with bonds and preferred stocks being called because of low rates, alternative assets getting expensive, and equity investors rotating out of higher growth names. Today, some of the best opportunities we can find are in value-oriented dividend growth stocks. In particular, we continue to see financials, and blue-chip industrials attract money with their low P/E ratios, larger than average dividend payouts, and cyclical slant. It’s possible that more of the parked cash could start to make its way into these sectors given their relative attractiveness. Certain health care names also fit this mold with stocks like ABBV, PFE, and JNJ picking up as political and legal pressures ease.

Other dividend yield heavy sectors like REITs, Staples, and Utilities have not fared as well. The recent bounce in longer-term interest rates is weighing on these traditionally defensive groups. To the extent the global economy continues to bottom, we should expect more of the same.

Other groups like Discretionary, Communications, and Energy are more puzzling. Energy has been plagued by chronically low commodity prices because of a world awash in oil and gas. Yet, it has gotten almost no boost from a bottoming in growth. Discretionary and Communications have been much more of a mixed bag. There are winners and losers and stock picking has been crucial. For example, Target blew their recent earnings report out of the water while old-guard retailers like Macy’s continue to struggle. Disney is exploding with the success of Disney+, yet Netflix has consistently lagged this year. In this group, strategy is dictating success. Companies without a solid plan are in trouble and those that have one can thrive.

Tech and Material names stand on their own and have performed well of late. These sectors aren’t chock-full of higher dividend-yielding value stories, but their cyclical nature has been enough of a catalyst. Still, there are a few names within this group that are a mix of both. In particular, AVGO is a higher-yielding name breaking out on improving prospects of a trade deal. Stock picking is critical here as well.