Why You Shouldn’t Overhaul Your Portfolio Right Now

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Why You Shouldn’t Overhaul Your Portfolio Right Now

Biotechnology stocks and the Russell 2000 began rolling over at the beginning of July, followed by transportation stocks at the end of the month.

It’s definitely a signal that the stock market is tired, but after such a strong breakout performance in 2013, the market still hasn’t experienced a material price correction in quite some time.

Second-quarter earnings came in mostly as expected and many blue-chip stocks sold off on good results, while companies backed existing full-year guidance. This happens often, as management teams try to make it easier for the company to “outperform” Street consensus. In a lot of cases, the only reason earnings per share advanced comparatively was increased share repurchases.

But it was mostly a decent earnings season and corporate balance sheets remain strong.

There’s not a lot of action to take in this market. Stocks have gone up tremendously and earnings are playing catch-up with valuations.

A little extra cash isn’t a bad thing with equities at their highs; however, finding good value with the prospect of growth in this market is becoming difficult.

I still think the domestic energy sector has a lot to offer investors, particularly those who are looking for income. Pipelines are a good business to be in as they throw off lots of cash and in many cases, revenues are not tied to the spot price of the underlying commodity.

With speculative fervor now reduced as evidenced by the trading action in biotechnology stocks, initial public offerings (IPOs), and select technology companies, it’s reasonable to expect the next couple of months to be pretty lackluster in terms of trading action. (September and October are often difficult months.)

A lot of the market’s leading stocks, many of which are blue chips, have pulled back from their highs and may once again produce another price consolidation; not a full-blown correction that would make being a buyer of equities so much more attractive, though.

I view this market as a hold but am not enthusiastic about investors buying simply because many of the best stocks have already gone up tremendously and valuations aren’t attractive.

While I still like such market-leading issues as NIKE, Inc. (NKE), Johnson & Johnson (JNJ), and The Walt Disney Company (DIS), these stocks are no longer screaming buys. With a major stock market correction they would be, but not right now. (See “Why It’s Time to Cull Your Stocks.”)

In a marketplace of low single-digit economic growth but strong corporate balance sheets, dividend income becomes a major component of expected return.

Stock market leadership has been slowly transitioning away from last year’s stars (DOW stocks), and the relative outperformance of the NASDAQ Composite, and even the S&P 500, shows maturation in this cycle.

A lot of investors are looking to the fourth quarter for a reacceleration in share prices barring any new shock to the system. This is a reasonable expectation, based on corporate outlooks and the prospect for rising dividends going into next year. But be wary of those trying to sell you a whole new portfolio at this time. Share prices have already gone up.

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