Fueling the bull market lately has been FOMO (Fear Of Missing Out). Regrettably, it's a reliable contrarian indicator that stocks are poised for a fall. The dynamic is based more on greed than fundamentals.
FOMO may soon give way to something else: just plain fear.
I expect Wall Street's euphoria to wane in the final weeks of the year, as new economic reports show flagging growth and trade tensions persist. Consumer spending and jobs are strong now, but they're lagging indicators.
Stocks hover at all-time highs, with investors awaiting the next definitive catalyst for another upward surge. Looming over markets are negative corporate earnings growth, global economic deceleration, the Trump impeachment battle, Brexit chaos, and the continuing damage of tariffs.
The three major U.S. stock indices closed essentially flat Thursday, although the S&P 500 managed to eke out a slight gain for another record close. Treasury yields declined, due to economic weakness overseas.
In pre-market futures trading this morning, all three indices were poised to open in the green, due to positive comments yesterday from White House officials concerning the trade war with China. However, as I've frequently warned you, words and promises come very cheaply from government officials. Don't expect any tangible progress on trade, anytime soon.
To use the texting parlance of my millennial daughter, Wall Street's reflexive response to empty trade rhetoric always makes me SMH (shake my head).
Sputtering global growth…
Europe is holding its breath ahead of the December 12 national election in Britain, which will decide the fate of Brexit. Whether the Tories or Labourites win, the UK's departure from the European Union will be messy and economically painful.
As European and Chinese growth stalls, the U.S. has unexpectedly adopted the mantle of global growth engine. The stock market bulls point to recent strong data on U.S. employment and retail sales as positives that outweigh bearish signals such as slowing factory activity and declining business investment.
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What I find truly worrisome is the imbalance between corporate earnings growth and stock valuations.
This year, we're witnessing a reversal of the relationship between earnings and valuations that we saw in 2018 (see chart).
Despite turbocharged earnings growth last year, price-to-earnings ratios (P/Es) shrank. Conversely in 2019, P/E ratios have risen while earnings have contracted. So what gives?
Last year, the Federal Reserve was tightening the monetary spigot and recessionary signals were flashing red. The fourth quarter looked particularly dire.
Read This Story: Will The Ghost of Christmas Past Haunt Investors?
Earnings growth loses some of its punch when interest rates are rising and the economy is showing signs of slowing. Wall Street typically discounts forward earnings and last year it seemed that growth in 2019 would pale compared to 2018.
However, this year the Fed is dovish and economic growth in the U.S. is turning out better than expected.
Rebalancing for 2020…
Will we see a correction in the fourth quarter, as we did in 2018? It's a mistake to attempt to time the market. But the rally seems to have gotten ahead of itself, which means you should adopt defensive measures.
You should rotate toward sectors suitable for the late stage of economic recovery, such as utilities, consumer staples and health care. Particularly compelling right now are utility stocks. I've been heavily touting utility stocks…and for good reason.
The decade-long era of ultra-low interest rates has been beneficial for dividend-paying stocks such as utilities. Despite its run-up this year, the utilities sector has further room for growth. Utilities also enjoy insulation from the global trade war, because they have zero revenue exposure to China.
To pinpoint the best high-yielders in the utility sector, click here for our "dividend map."
As the year draws to a close, now's the time to rebalance your portfolio for 2020. Rebalancing entails selling positions that have surpassed your target allocations and transferring the profits to positions that are under-represented but poised to shine because of projected future conditions.
The following pie chart shows portfolio allocations that generally make sense now.
I define "hedges" as precious metals such as gold and silver, real estate investment trusts (REITs), and commodities, among other investment classes. Choices depend on your investment profile and how much risk you're willing to shoulder.
An appealing hedge right now that often gets ignored by investors are assets linked to agricultural commodities.
As developing markets seek higher standards of living, the world will witness ever-greater demand for food. Environmental degradation also boosts the need for higher farm output.
In 2020 and beyond, agricultural stocks and funds should thrive. Agriculture also serves as an effective inflation hedge, because prices for food tend to be the first and fastest to rise during inflationary conditions.
Read This Story: Seeds of Wealth: Why Agriculture Is a Smart Bet
In the stock sleeve of your portfolio, pare back your exposure to growth momentum stocks and increase allocations to safer income payers. This move is especially important if you're in or near retirement, because you're more vulnerable to corrections and volatility.
Do you sometimes get afflicted with FOMO? Emotions cloud judgment. Conquer your fear, by rebalancing now.
John Persinos is the managing editor of Investing Daily. He also serves as managing editor of Utility Forecaster. You can reach him at: mailbag@investingdaily.com
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