Credit: Shutterstock photoOne of the most fascinating things about financial markets is how quickly things can be discounted. Much of the volatility of the last few weeks has been blamed on the situation in Greece and the possibility of a fracture in the Euro Zone, the so called “Grexit.” This morning, however, following a long weekend of tough talk from both sides of the dispute the market has barely reacted.
In early trading the Dow is off about 20 points and the S&P 500 and NASDAQ are both roughly unchanged. That is remarkable given that the EU effectively issued an ultimatum to the recently elected Greek government: accept an extension of the current bailout or else. That notion was, of course, immediately rejected by the Greeks and things seem to be coming to a head.
Some of the lack of reaction could be down to a natural lack of enthusiasm following a U.S. market holiday on Monday, but it seems as if traders and investors have effectively shrugged their shoulders and sighed “been there, seen that.” What would likely have caused turmoil last week is now suddenly old news, barely worthy of a response. Instead the focus has been on a summary of the earnings season which is now drawing to a close, a season that "surprise, surprise" has seen around two thirds (69.8% to be exact this time around) of companies reporting beating estimates for EPS.
As is so often the case, though, the likelihood is that the market has it right and those predicting doom are exaggerating somewhat. Last month, when it became clear that the Syriza party had won the Greek elections, I pointed out that the lack of immediate reaction then made perfect sense. It still does. The fact that both sides are talking tough is nothing new, but until push comes to shove the smart money is still on an eventual compromise of some kind.
So, we are left with a market which, based on the last few weeks earnings and economic data, looks about fairly valued. Given the proximity to all time highs, any upward progress is likely to be a hard slog. For most investors this means a period of evaluation and consolidation in their portfolios. Those looking to make some changes should consider a couple of things. If stocks are at reasonable valuations based on the economic outlook, then it is time to narrow your focus somewhat.
Broad based index funds should form the core of most investor’s portfolios, but during periods of relative calm return can be enhanced by shifting some resources to individual stocks. To put it another way, general market growth is now priced in and value, rather than growth potential, should be the focus.
That strategy should be pursued with one thing in mind, however. As unlikely as it is, the possibility of a Grexit could transpire, and if it does, it could lead to contagion in Europe. Again, despite its unlikeliness, those things are still a possibility. For that reason, some sectors that lend themselves to value-seeking should be avoided until an actual resolution is reached. Energy, for example, is tempting, but should only be considered by those with an appetite for risk and a disciplined trading style.
There is no doubt that there are opportunities there that, with 20/20 hindsight, will look great at some point in the future, but if there are problems in Europe, oil’s stabilization and recovery will quickly be in danger. Financials also look like a value play right now, but anybody with exposure to European debt, which is almost everybody in the sector, represents an unnecessary risk.
Instead, finding value in the traditional areas of materials and manufacturing may be more profitable. Those with more of a taste for risk could consider tech and pharma, but again the focus within those sectors should be on value rather than growth. Something like Johnson and Johnson (JNJ), a company that could be considered as a manufacturer as well as a drug company, may be a boring choice, but recent declines in the stock have left room for some relative outperformance if we bump along for a while.
This morning’s calm in equity markets, despite signs that Europe is heading for deep trouble, indicates that we are at appropriate levels. It may be somewhat counterintuitive as most are tempted to chase a return in quiet markets, but that means that investors should be shifting their focus from growth strategies to more mundane, value based investments and reducing risk in general.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
