Sunday, August 12, 2012

Trahan: Equity Markets Mid-Way Through Melt Up

Francois Trahan recently spoke with Consuelo Mack on WealthTrack and stated his belief the equity market is mid-way through a melt up. He believes this could last through the end of the year and possibly into the first quarter of 2013. He believes cyclically oriented stocks like industrials and materials, as well as higher beta equities, will be the better investments during this melt up. He believes the S&P 500 Index could reach a high of 1,550. He does believe the market continues to be a secular bear one; however, he does believe we are in the midst of another cyclical bull. He notes in the past 20-years, there were four 50%+ moves in the Japanese market and our low inflation environment is not too different from theirs. In short, he believes buy and hold is dead for the foreseeable future.

From a fundamental perspective he notes several of the cyclical components of the Index of Leading Economic Indicators have turned higher: interest rate spread, average weekly manufacturing hours, and manufacturers’ new orders for consumer goods and materials. Housing continues to improve as housing affordability is at a record high. Also, investors will be drawn out of fixed investments as their low sentiment about equities will provide a tailwind for a short term equity melt up. No doubt, investors continue to allocate investment funds to fixed investments as they are in a "risk off" mindset.

Although Trahan does not provide specific stock ideas in the interview, he does state investors should focus their equity investments on dividend paying stocks. Over 60% of S&P 500 companies have a dividend yield greater than the 10-year U.S. Treasury bond.

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