Oppenheimer's Ari Wald says we've now broken a multi-year uptrend in the US stock market that started in February 2016 with greater downside risks to commodities and other areas.
Wald now sees us in an important transitional period for stocks where fund managers need to keep a close eye on credit spreads and further weakness in the high yield market.
“Uptrends don’t just reverse from up to down. I think we’re at a transitional point where the trend is reversing sideways,” Wald said.
The market is already sending warning signs that we’re entering this transitional period. Factors such as leadership moving toward low volatility bond proxy sectors, cracking credit spreads and a weakening high yield market, all together signal where the greatest risk lies in the market.
Wald believes that risk is in commodities and globally exposed areas which are falling to multi-decade lows. It’s this type of weakness he said, that poses the greatest threat because it’s a loss you won’t get back. These areas tend to have much more damaging breakdowns, and are places you’ll want to avoid, Wald pointed out. “The weak tend to get weaker when the macro turns and that’s what we’re seeing.”
While Wald noted the uptrend is broken and that such volatility did damage risk assets, he says he’s hesitant “to get too downbeat.” The silver lining, he added, is that some of the risk assets are so oversold, they’re “due for some upside relief.”
Wald cautioned against positioning yourself too defensively and said the way to play right now is with balance. Focusing on dividend growth rather than high dividends is a better bet as there tends to be a quality aspect to those stocks.
Many have expressed concerns over downgrading FAANG stocks, but Wald doesn’t see them as the sector we should be worried about. “I think they need some time to move sideways but for the longer term, I think they’re still okay.”
As weak as the U.S. has been, Wald still considers it “the best house in a bad neighborhood” given that global indexes in developed and emerging markets have broken down by a much more significant degree. “It’s too late to get too defensive… a lot of dividend growth names strike that right balance.” Wald advised heading for “chicken cyclicals” such as technology and healthcare, “where you can participate on the upside but not necessarily get killed through the market turbulence.”