CIO suggests a more defensive positioning for the next few months might be a prudent move
The fascination with bull markets revolve around the fact that despite them being much-watched and analyzed, they never end for the reason everyone predicts.
The speed and power of the market bounce since the pandemic selloff of March 2020 means investors have been expecting it to slow and potentially rollover. Greg Taylor, CIO of Purpose Investments, believes that, if you just look at the math, this should happen sooner rather than later as year-over-year comparisons get more difficult. So far, though, this has not been a problem despite many calling for a selloff and July actually saw the market climb higher on the mythical “wall of worry”.
However, Taylor warned: “We are entering the seasonally worse stretch of the calendar for equities. August until October can be volatile with quick selloffs that come out of the blue. As markets have had a great run to start the year, having a more defensive positioning for the next few months may not be a bad option. The bull market should continue but it’s probably not as much of a straight line as many have grown accustomed to.”
Crucially, this bull market has featured sector rotation. Since the U.S. election last November, cyclicals have led while large-cap tech stocks sat on the sidelines. But there was a recent change as tech stocks took over as overall markets regained new highs.
Taylor added: “Much like watching a duck swim along the water, on the surface all looks calm, but beneath there is a lot going on. For those calling for a top, it is notable that through July there was a tone change in the market. The rise of the delta variant has caused many to question if the market has gotten ahead of itself and had priced in too much good news.”
The bond market reflected this, as bond yields collapsed from 1.5% to 1.15%, causing massive sector rotation, with the reopening stocks taking most of the pain. Energy ended its eight-month winning streak and financials followed bond yields lower.
Taylor does not believe any variant virus will kill the bull market because there is simply too much underinvested cash in the system that must go somewhere. However, he warned that we are far from being in the clear. Has the market factored in worst-case scenarios?
He added: “As we saw this earnings season, good news and numbers have been sold, leading to a concern that we have reached peak everything. If all the good news is already in the market, the only surprises we will get are negative.”
