5 Reasons to Remain Cautious on US Equities

By Walter Kurtz, Sober Look

US equity markets are touching multi-year highs as investors increasingly allocate to the risk-on trade. But there are a few signals that may indicate some need for caution – at least in the short-term:

1. As discussed earlier (see post), consumer sentiment remains quite weak, which could easily create headwinds for corporate earnings.

2. Energy prices have been on the rise, with WTI crude oil at the highest level since September.

3. Regional manufacturing data isn’t showing much improvement. The Richmond Fed index came in significantly below expectations.

Richmond Fed Manufacturing Activity Index

What’s particularly troubling about this index is that the component tracking manufacturing output prices declined while input prices rose. Not great for margins.

Richmond Fed Manufacturing Activity Index

The Philadelphia Fed Survey and The Empire State Mfg Survey also both came in materially below expectations last week.

4. At the national level, activity remains subdued. The Chicago Fed National Activity Index today came in below analysts’ forecasts. U.S. economic growth is still fairly weak.

5. From a technical perspective, the world all of a sudden turned bullish. According to Merrill Lynch, investor “cash allocations fell to the lowest level since February 2011” and “allocation to bonds fell to lowest level since May 2011″. We may not yet be at a level professionals would view as a contrarian signal, but this should certainly signal a need for caution.


Got a comment or question about this post? Feel free to use the Ask Cullen section, leave a comment in the forum or send me a message on Twitter.
Sober Look

Sober Look

Sober Look was founded by Walter Kurtz, a New York based hedge fund manager and credit markets specialist.

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  • BHB

    Good points. The high and ever rising bullish sentiment is of particular concern. Consumer spending, which drives 70% of our economy, may also take a hit as the payroll tax hike will dampen consumption. Valuations still look a little rosy. Time to keep the powder a little dry and maybe hunt for bargains that ensure a decent margin of safety. High growth, cyclicals may get taken to the woodshed this year.

  • Boston Larry

    Where is there a “bargain that ensures a decent margin of safety”? Are there any out there? Apparently traders and many investors think there are, the way the Dow keeps on rising into this new year. Equity markets are overbought and sentiment measures are overly bullish. I concur with a lean toward caution.

  • BHB

    A “bargain that ensures a decent margin of safety” just means individual equities that have already been beaten down or are misunderstood in general. I look for strong recurring cash flow with high free cash flow yields, large share repurchases, and Benjamin Graham type investments where liquidation value exceeds current market price etc. Sometimes looking back to early 2008- 2009 by reading 10-q’s and seeing companies that did quite well during some terrible times. You are right: this is a terribly overbought market but I would by no means park my money in 100% cash or try to market time. Therefore, I tend to look at dirt cheap stocks with decent or misunderstood fundamentals. Just my strategy amongst a myriad of techniques.

  • Boston Larry

    @BHB, Thanks.

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