The market is running with a trifecta of anticipation. Investors expect multiple rate cuts from the Fed, a trade deal with China and improving earnings later in the year. In other words, it is running on expectations things will be close to ideal. However, the market is vulnerable if one or more of the expectations are not met. Valuations are back to the highs seen last year and the market has been rewarding companies with poor earnings more than companies with good earnings. This is one sign of a mania, the other is the massive move to passive investing. JP Morgan reports 60% of equities are held in ETFs or index funds and another 20% is held in quantitative funds. This move to letting machines run your investments is scary, since it does not involve any fundamental research. We have continued to see a big move away for active management into passive management and that usually means the next wave will be in active management. We would say risks are high, but momentum and the Fed are likely to keep things on a decent path, but steep and swift retreats are growing more likely – like we saw in December and May. Investors should not be getting more aggressive, but rather lighten up a bit on equities, especially those poor earnings.
I like the stocks below which are high quality, large cap, and dividend paying.
Molson Coors Brewing Co – TAP – Consumer Staples Sector
- Valuations remain cheap relative to itself and the peers
- TAP has been reducing LT debt by 22% or $2.47 billion over six quarters
- Typically slower economy and or recession is favorable for beer sales
- Molson Coors has a small exposure to the cannabis industry and it took a stake in small company to create non-alcohol cannabis drinks.
Travelers Cos – TRV – Finance Sector
- Majority of their revenues are in the US
- The Finance sector tends to do better in strong dollar environments
- Insurance is a necessity for business and contracts are inflation adjusted based on the insured property
- Repurchased 3% of outstanding shares in last 12 months
VZ – Verizon – Telecommunications Services Sector
- $18 Billion in free cash flow
- ~4.0% dividend yield
- Utilities/Telecom sector is one of the least correlated to the stock market
- New research showing that consumers are addicted to their cell phones and consumers also pay their cell phone bill first out of all of their expenses (Cell phone, car payment, credit card, mortgage; in that order)
Disclosures: James & his firm own TAP, TRV & VZ in his mutual funds, GLRBX. There is no investment banking relationship.