Markets posted another weekly loss, with the Dow’s year-to-date performance falling below 5%. I had originally suggested taking profits early in March, primarily because the summer is typically weak. However, both domestic and global issues have placed an elevated level of downward pressure on equity markets. Europe, which makes up over 20% of the global economy, is back in the news and banks will be under increased political scrutiny as a result of JP Morgan’s failed hedging strategy, which generated over a $2 billion loss. Thus, be prepared for a volatile week–one that will ultimately lead to buying opportunities.
In my estimation, small and mid-cap securities are prone to suffer from a higher level of downside pressure through the end of August, while blue-chip names offering dividends will likely remain stable. Accordingly, don’t overlook the telecom sector, specifically AT&T (T); healthcare names that include Abbott (ABT) and Gilead Science (GILD); utilities such as American Electric Power (AEP) or a broad based fund similar to the iShares Dow Jones Select Dividend Fund (DVY).
Since timing the market is unrealistic, I have begun a slow and selective process of migrating back into equities while the market is still in a “risk off” state of mind. In addition to adding to blue chips offering dividends, I am preparing to pick up beaten down high flyers such as Chipotle Mexican Grill (CMG) and Apple (AAPL), which appear to be selling at attractive prices today.
Let me stress that it is important not to overreact during market corrections. Instead, carefully adjust your mix of stocks, bonds, and cash equivalents to reflect the risk associated with the news impacting the market’s action. As I emphasized last week, the safest places to hibernate profits (until around Labor Day) are short and intermediate corporate bonds, and cash.