Ari Wald: US Tech Stocks Leading the Way Once Again
Many are cautious about this bull market, especially given that it’s 8 years into its run. This time on Financial Sense, we spoke with Ari Wald from Oppenheimer about the S&P 500's recent bounce back to record highs and why he thinks the US stock market, despite already high valuations, still has a way to go.
We’re Near Mid-cycle, Not the Top
The market is exhibiting mid-cycle behavior, and investors should focus on the healthy bull market conditions we’re seeing, Wald stated, rather than trying to anticipate the next market top and downturn.
Going back to 1928, the best definition of a major cycle low is not experiencing a 20 percent decline, but rather falling to an 18-month low, he added. Every 18-month low through history has generally picked up important market bottoms.
Since February 2016, we were down 15 percent from the prior high 9 months before, and the market had retraced 18 months of prior performance, Wald stated. Since then, internal breadth has brought in, leadership has turned pro-cyclical, credit has improved and interest rates have gone back up.
In other words, these characteristics are what we’d expect to see at the early stages of a new bull market.
“I think we’re transitioning more mid-cycle now,” Wald said. “The important point is, we think this bull market is intact, we think it’s healthy and we think these minor pullbacks … should be bought.”
He expects the S&P 500 to make new highs, and he has a target of 2,500 for the year.
Sector Rotation Signals
In general, market rotations characterize a healthy advance, Wald noted. This helps prevent any sector from becoming too strong or weak and creating an issue or dragging everything lower.
Instead, rotations help register incremental market gains, Wald stated. Over the past few years, rotations have been driven by inter-market factors such as interest rates, commodity prices, and currencies, where investors have moved rapidly back and forth between asset classes.
“Through these market rotations, technology has really been the one standout that’s been able to withstand those oscillations in intermarket activity,” Wald said. “It’s been a very steady performer over the past few years. Given the broad-based nature of the strength in the sector, we really think it’s a prime candidate to continue to lead these gains.”
As far as other tactical rotation ideas, Wald sees two standouts: the industrial sector and consumer discretionary.
The industrial sector has done very well post-election, but after its run, it has underperformed. However, it’s held support levels and is still in a broad-based move. The sector could take a leadership role once again, he stated.
Likewise, following 15 months of underperformance, consumer discretionary has also shown signs of turning the corner and looks likely to benefit from market rotations in coming months, Wald added.
What Might Trigger a Fall?
Still, some are concerned about a market top, and Wald believes it’s important to consider that scenario as well. The question is, what might trigger a top or downturn?
“We always like to put on our bear cap,” he said. “It’s an important point: we have trouble finding and identifying that culprit.”
Traditionally, small caps tend to be a late-cycle warning when they start to break down, Wald noted. They have underperformed year-to-date, but they haven’t broken down and are actually more recently showing signs of inflecting higher.
While potentially an underperformer, energy has also turned the corner.
“Looking out internationally, Europe could be a potential culprit,” Wald said
If Europe rallies back but starts to stall at long-term resistance, that could be the culprit that drags everything else down, Wald stated.
However, he doesn’t believe this is what will happen, and he noted he’s heard repeated calls from technical analysts for Europe to break higher.
“Every time we hear that we get really excited,” he said. “Because if they’re right about Europe — that there’s this tremendous opportunity and Europe breaks higher and moves into this new secular bull market — the S&P 500 … is going significantly higher.”
Rising Rates Not a Concern
There’s a possibility for interest rate increases to cause a summer swoon. But Wald doesn’t think rate increases are a problem right now.
Historically, bull markets can continue through a tightening cycle and forward performance can remain strong, he added. It isn’t until the Fed tightens and the yield curve inverts that we’re at greater risk of an economic recession.
His favorite sectors right now are technology, industrials, and consumer discretionary. These are where he would put money to work.
“Don’t be worried because the Fed is tightening interest rates,” he said. “An inversion of the yield curve — not a flattening one — has been the more worrisome signal that an equity market top might be at hand, and we’re not there yet.”
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