01 May Whoa Nelly” — Time to Get the Caution Flag Out!
A new record high in the stock market is a good thing as long as corporate earnings continue to improve; however caution is warranted when prices move steadily higher at the same time business appears to be slowing.
Now as you all know, I don’t have a crystal ball, but I can read and there is one big yellow flag being waved this earnings season that needs to be paid attention to and that is corporate ‘sales growth‘ or the lack thereof. Over and over again, companies are reporting little if any increase in their underlying sales and that will eventually be a problem if things don’t improve.
Since the great recession of 2008 – 2009, companies have cut costs, refinanced high interest debt and right-sized their businesses for today’s more challenging economy. Developed governments around the world have poured on the gas through various stimulative programs in the hopes of accelerating economic growth, improving consumer confidence and increasing asset prices. Well that was all fine and dandy, until now—this quarter business is definitely slowing. Don’t get me wrong, that doesn’t mean investors can’t benefit from higher corporate earnings and ultimately stock prices through share-repurchases, cost cuts, asset sales or acquisitions, but it does mean the quality of those benefits are beginning to deteriorate. What needs to happen is business needs to sell more stuff! Growing sales eventually lead to new business loans, equipment purchases and hiring—something this economy could use more of.
As you know, no one has a clue what the next few quarters are going to look like but I believe if the current trend continues something has to give. Either today’s record highs in the stock market are a correct prediction of only a temporary slowdown or we are susceptible to a market sell-off that better aligns stock prices with a slowing economy. Only time will tell, but with stocks fairly valued, I believe short-term caution is in order. My recommendation is to have a little extra cash along with some put options (downside insurance) to protect your portfolio in case something temporary turns out to be more permanent.