North American equity markets have recovered from the sharp correction felt in the early weeks of the year, as fears of a global recession have subsided. More stable commodity prices, decent economic data and a slower expected pace of rate increases by the U.S. Federal Reserve have helped equity prices rebound nicely.
However, equity markets may be hitting a near-term ceiling, with valuations looking a bit extended. Both the S&P 500 and TSX indexes are trading at about 17x forward price-earnings multiples, a premium to the 10-year average of about 14x forward price-earnings multiple for both indices. As well, market sentiment could be tested in the coming months with the U.K. referendum in June and the U.S. Republican convention in July.
From a technical perspective, North American equity markets appear to have run into some near-term upside resistance with the S&P 500 index stalling as it approaches the 2,100 level (an area of overhead supply) and the TSX at the current downward sloping 200-day moving average level. Given this backdrop, equity markets will likely remain rather range-bound and higher levels of volatility will persist in the coming quarters. Indeed, a continued global economic recovery and more robust corporate earnings will be needed for a more meaningful advance in equity prices.
In Stan Wong Managed Portfolios, we prefer large-cap, high-quality North American companies with strong balance sheets, reliable earnings streams and positive growth attributes. Currently, client portfolios are positioned cautiously with above-average levels of cash as we take a very tactical and nimble approach (as always) to stock selection. We continue to survey the market to take advantage of near-term pricing opportunities (both on the buy and sell side). Using a baseball analogy, we suggest investors look for singles and doubles rather than home runs given the unsteady market environment.