In the short run, a pullback is likely, but we would view that as an opportunity to put cash to work. The S&P 500 has started out strong in 2019, up 10.45% on the year. The move has been rapid. Normally when you hit technical resistance such as a 200-day moving average, people naturally look for an excuse to take profits.
We are beginning to hear the usual noise from Washington again and retail sales numbers for January came in weak, which was enough to see a pullback Thursday. When we look at the charts, we believe a pullback to about 2600 on the S&P 500 or around 5% would be very healthy for this market both fundamentally and technically. Here is an example of a head and shoulders bottom courtesy of the CMT Association:
For investors though, trying to time small short-term moves is ill advised. Instead, at points like this, rebalancing, putting cash to work, or just sitting tight, are normally the best course of action. Only when you see extreme valuations should a more cautionary approach be considered.
Today, when we look at the market, we see the S&P at 16.4 times earnings versus it’s 5-year average of 17.8, which is not alarming. We still view a recession in 2019 as highly unlikely based on the data and the Fed continues to switch towards a more cautious approach on interest rates, which is accommodative. Inflation remains under their target of 2%, and while we see growth, it is not tremendous growth. All this is adding up to more of a Goldilocks type of economy where quality companies can fare well. We favor companies with strong dividend growth and clean balance sheets in this current environment. While we expect the turbulence to pick back up, we are finding opportunity and would welcome a small pullback to add to positions and put cash to work for our investors.
This last Thursday, Robert Luna, CEO & Chief Investment Strategist at Surevest, was on CNBC Asia discussing these topics. Listen in to his interview here.