Gina Martin Adams: Stay Defensive Late in the Bull Cycle

Mon, Jun 17, 2019 - 11:43am

Bloomberg’s Chief Equity Officer, Gina Martin Adams, explains how we are in a "sheep market" and that a defensive posture is advisable at this point in the market cycle. Here's what she had to say in a recent interview with Financial Sense Newshour.

Sheep Markets Prone to Flight

Gina characterizes this as a sheep market—late-cycle within an expansion phase—where stock prices are on the rise but at a slower pace and in a more volatile fashion.

She refers to later-stage market cycles as sheep markets because they are easily unsettled and prone to flight risk. Right now, a large source of market volatility is being driven by long-term policy decisions and trade agreements that could have far-reaching effects (see Policy Misstep Deja Vu?).

“We are in a period of consolidation if not outright correction, and we're recommending that investors position accordingly,” Gina said. “I think it's most prudent to be somewhat defensive for anyone still invested in this equity market.”

Yield Inversions Signal Headwinds

Recent narrowing in the 10-year and 2-year Treasury spread shows we’re in the later stages of an economic cycle. Other inversions, such as between the 2- and 5-year in December 2018, and the 3-month and 10-year (that we’ve seen twice so far in 2019) highlight this concern.

These triggers confirm that we’re in the later stages of an economic advance, she said. If we see an inversion of the 2- and 10-year spread, on average, it indicates that we are 13 months out from the equity market’s peak for the cycle.

See related podcast: The US Stock Market Is Near a Major Turning Point, Says Dr. Woody Brock

While the yield curve inversion does put a timetable on the economic cycle, its relevance will be determined by what the Fed does from here, she noted (see Fed Should Be Cutting Rates and Starting a New Easing Cycle, Models Show).

Defensive Posture Advisable

In terms of allocating a portfolio right now, Gina outlined Bloomberg’s sector score card which looks at five factors: price momentum, price spreads, the earnings trend, earnings spread, and valuations. This model shifted slightly toward a more defensive posture at the beginning of the second quarter, she noted, with utilities and real estate at the top and financials, materials, and energy at the bottom.

When commodity prices are falling, the worst place to be in the stock market is in energy and materials, she said. When bonds are rallying and yields continue to fall, the best places to be in the equity market are defensive.

“Much higher volatility over the course of the last month or so has certainly supported a move toward less volatile stocks, and more stable stocks. … I can't deny the fact that the first four months of this year were phenomenal. We got back to new highs on the S&P 500 already by the end of April. It does look like we're set up for a period of potential consolidation in the short run. But as very wise people have told me … stock prices rise over long periods of time, and if you keep that sort of perspective in mind, it's pretty valuable and helpful.”

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