January 23, 2019

In light of the spectacular stock market rebound off the Christmas Eve lows, I wanted to take a quick look through the rear-view mirror to examine some facets regarding the impact that correction had on investor sentiment, and what we can learn from the recent washout. The sell-off officially started on October 4th and ended December 26th after the S&P had lost roughly 20% of its value. In the span of only 17 trading days, the S&P has now rallied from 2,346 to close last Friday at 2,670 – a stunning 13.8% rebound off the lows and easily the most impressive short-term rally I’ve experienced in my 34 years in the business.

We can pretty much define the sell-off unfolding in three phases: investor concern in October, investor fear in November, and investor panic in December. The CBOE Volatility Index (VIX) spiked from 15.96 to 36.41 and has subsequently fallen back to 17.42 as of Friday’s closing bell. It’s as if Shakespeare’s play “The Tempest” were being played out in modern times – that’s the play where the sorcerer Prospero conjures up a great storm to cause his victims to believe they are shipwrecked on a remote island.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

For investors who were long the market on Christmas Eve, it sure felt as if stock portfolios had run into a jagged reef with the hull taking on water. But in the few days after Christmas, news of the Fed changing its hawkish tune, the U.S. Trade Team announcing a trip to China in early January, and solid holiday retail sales data put a fire under a deeply oversold market and the bulls haven’t looked back since.

Most investors are not aware that there is a highly influential “crowd effect” that exists on the floor of the NYSE. This elite group of floor traders has powerful influence on short-term market sentiment. Within the “crowd,” seeds of optimism and pessimism are sown which are watered by the biggest global trading desks they work with, which then morphs into public sentiment. These “specialists” are those whom CNBC’s Bob Pisani speaks with on the floor of the NYSE and reports to viewers daily. I personally like what he has to contribute more than most of the network’s talking heads, who often wear their emotions on their sleeves. Instead, Bob Pisani often gets the best insights into what institutional money is thinking.

It stands to reason that the current “crowd” sentiment has resolved that a trade deal is taking the form of a huge bribe by China to buy $1 trillion of goods over the next six years with the intention of reducing the trade deficit to zero. The offer states little if anything about the structural issues that investors are by now acutely aware of. China’s economy is being evermore impacted by tariffs, which President Xi is feeling pressure from, and President Trump’s needs to shore up his sagging poll numbers and calm the market.

This is the kind of deal that can get done in the next four to six weeks, before the next round of tariffs kicks in, and this is why we’re not hearing from trade hawks like Peter Navarro and Robert Lighthizer, since China floated the offer. This comes only 10 days after Mr. Lighthzer said he didn’t see any progress made on structural issues during the Jan 7-9 U.S./China talks. And sadly, China’s latest deal doesn’t offer any new concessions on structural factors. But again, desperate men (Trump and Xi) do desperate things.

Wall Street wants to believe that there is a deal in the making, so the Trump team is more than willing to put structural issues off, to be dealt with later. This means the market narrative has found a way to paint a much rosier picture than one month ago. The “crowd” is anticipating a grand purchase deal with China, the Fed is on hold, the government shutdown affecting 800,000 workers is more politics than economic impact, the risk of a hard-Brexit is out in late March, early Q4 earnings reports are encouraging, and the global slowdown will somehow come to an end if a trade deal is struck. At least, this is how I’m seeing it.

Ballast Stocks That Withstand Storm Conditions

After such a spectacular rally off the late December lows, it would seem unimportant to talk about the possibility of another retest of the lows anytime soon, given the remarkable change in crowd sentiment. At the same time, if the stars don’t line up in the next few weeks and market volatility returns, stocks may undergo some back and filling, so it might pay to point out a couple of realities on the “income” frontier.

Being long cash now pays somewhere between 1% and 2% in money markets. Short-term Treasuries pay about 2.5% to 2.7%. Qualified dividends that pay yields north of 3%, where taxes are capped at 20% for those with ordinary income taxed at the max rate of 39.6%, sure beats yields on cash and Treasuries while paying that same 39.6% rate on earned interest from bonds and money markets.

In a market where all rationality sometimes goes out the window – like in mid-December, when the “sell first, ask questions later” mentality drove the tape – it always gets my attention when the market reveals which stocks it trusts the most to manage through the storm. Every market correction uncovers those few names the “crowd” finds to be not just worthy of holding, but worthy of piling into further.

As most stocks caved in during the height of the selling pressure, I noticed five big-cap blue-chip stocks that traded at decade-long highs, or at new all-time highs.

For 2019, the short-list of ultra-safe stocks that big money wants to own when volatility spikes is a pretty clear-cut portfolio of all-weather, dividend-paying equities that throw off qualified income and pay yields above 3%. The blended yield of these five stocks is 3.67%. Not bad, if one has to ride out another storm.

Thankfully, the market has found its footing and investors are feeling a huge sigh of relief, although the year ahead still holds a high degree of “risk-off” potential. At such times, it’s invaluable to know what to rotate into on short notice. After screening stocks for comparable market cap, defensive sector properties, financial strength, and dividend yield – these five stood out like lighthouses against crashing waves.

Navellier & Associates does not own KO, DUK, PFE, PG, or VZ in managed accounts or sub-advised mutual fund. Bryan Perry does not own KO, DUK, PFE, PG, or VZ in a private account.

About The Author

Bryan Perry

Bryan Perry
SENIOR DIRECTOR

Bryan Perry is a Senior Director with Navellier Private Client Group, advising and facilitating high net worth investors in the pursuit of their financial goals.

Bryan’s financial services career spanning the past three decades includes over 20 years of wealth management experience with Wall Street firms that include Bear Stearns, Lehman Brothers and Paine Webber, working with both retail and institutional clients. Bryan earned a B.A. in Political Science from Virginia Polytechnic Institute & State University and currently holds a Series 65 license.

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