After a sharp rally from the January/February lows, North American equity markets are showing signs of fatigue. Valuations appear somewhat extended with both the S&P 500 and TSX indexes trading at about 17/18x forward price-earnings multiples, a premium to the 10-year average of about 14/15x forward price-earnings multiples for both indexes. From a technical perspective, the 2,100 level (an area of overhead supply) remains as upside resistance for the S&P 500 index while the 14,000 level appears to be an area of overhead resistance for the TSX.
Near-term market anxieties include a sluggish corporate earnings picture, anemic global economic growth, geopolitical tensions, an uneasy U.S. political backdrop and of course, the timing of Federal Reserve interest rate hikes. Given this setting, North American equity markets will likely remain rather bumpy and range-bound in the coming months ahead. Indeed, we will need a robust rebound in corporate earnings to provide a catalyst for equity prices to advance meaningfully higher.
In Stan Wong Managed Portfolios, we currently prefer large-cap, high quality North American companies with strong balance sheets, reliable earnings streams, growing dividends and lower beta attributes. As we move into the late cycle phase of the economy/stock market, we continue to believe that today’s market environment requires active portfolio management with tactical stock selection and defensive risk controls including stop loss strategies.