Here is a collection of some of the arguments for equity selling and further buying.
The buy side
- The broad fiscal policies have prevented business failures and also kept savings supported which allows countries to bounce back quickly.
- The Q1 results were very good and pushed earnings forecasts higher. UBS, for instance, expects global earnings to grown 38% vs a previous estimate of 31%.
- The Fed is happy to let markets run hot. With the Fed adopting an average inflation target and being prepared to watch inflation overshoot a little, it shows that they are not in a big rush to push interest rates higher.
- The US is still trying to push through a $1.5+ trillion infrastructure package, so more stimulus is in the pipeline
European equity markets (like the FTSE100) still offer some value for stock investors.
The sell side
- As stimulus starts to wind down, equities look shaky with some at elevated levels.
- There is a stock rotation into the Russell 2000 as it flirts with all-time highs at the time of writing.
- If US inflation is NOT transitory then the Fed will be forced to raise rates. (Raising rates mean business conditions are less attractive and we will likely see a rotation out of equities into bonds).
- Pension providers have been short of the funds needed to meet their obligation for some time now. This was forcing them to seek gains in riskier places. However, the recent gains in equities mean that some of those cash targets are being met. This means that pensions can now take that cash, buy long term bonds to match all their obligations with retirees in a process known as immunization. This is a key principle of liability-driven investing. See the Bloomberg piece here.
The takeaway
Global equities need a catalyst to correct, so wait for it. If you have made considerable gains look to lock them in/ technical areas to exit. If you are considering rejoining stocks just keep it very tight and lean against key levels.
This is not the time to buy at any old price as a correction is anticipated.
