By Liu-Yue (Louie) Lam, Co-Founder & Chief Investment Strategist, Oxstones Investment Club,
The January barometer bodes well for the stock market this year. Risk appetite has returned and investors are moving cash off the sidelines. I admit I’m enjoying a relatively stress-free ride up with the markets. But the value investor in me is also wishing for a pullback. I think I may get my secret wish soon especially with the U.S. stock markets at 5 year highs, the VIX and mutual fund cash levels at multi-year lows, and investor sentiment surveys remain very bullish. I’m an optimistic realist and understand this market rally is driven by cheap liquidity fueled by global central banks. But it is also foolish to fight the trend. Don’t fight the Fed.
This market is headed higher and will eventually hit higher levels this year. However, the markets never go up in a straight line. A mild correction is healthy for extending a bull market. Timing the market is difficult so it’s more important to realize there’s always a mini bull market and a mini bear market somewhere. It’s our job as investors to find it. The current pockets where I see tremendous value are in commodities and in precious metals. The markets are usually leading indicators for economic growth. It’s forecasting stronger than expected growth, and therefore commodities (material and energy) should outperform. Precious metals should also continue to do well in an environment where there are negative real rates and continue global currency debasement.
The next few months will provide another buying opportunity to pick up shares on the dips thanks to a dysfunctional U.S. Congress. Two important dates to keep in mind are on 3/1/13 when sequester expires and $85B in automatic spending cuts kick in this year, and on 3/27/13 the U.S. government may potentially shutdown. Who needs the government? The markets can continue to operate just fine with political gridlock. However, higher taxes are kicking in this year and the economy is still in slow growth mode. Corporations remain hesitant on capital spending and continue to play defense by just shrinking equity through stock buybacks to add value. Continue high unemployment and now higher taxes and rising gasoline prices will reduce discretionary income and constrain consumer spending. Therefore we do need government spending to act as a counter-cyclical force in the economy.
There are several potential market catalysts on the horizon. An important event to keep an eye on will occur in March when the BOJ change leadership. BOJ might just surprise everyone and launch a massive QE program ahead of schedule. Another wild card may occur in March when China’s new leadership team takes over and may surprise the markets with new stimulus measures.