The Daily Dose: Four Brutal Market Truths

 | Jan 27, 2014 | 12:00 PM EST
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On Jan. 1, 2014 all of the notable strategists explicitly outlined a pullback in stocks in January. Better still, they suggested it could occur at some point in 2014. Well, unfortunately, I have a dose of bad news to report: They didn't.

How do I know this? I went back and combed through all of the "2014 Roadmap" PDF docs that flooded my email inbox in December. Then, I made a list of buzzy economists and strategists and watched interviews of them until 1 a.m. on Sunday. Hey, you think I got ahead in life by sitting on my behind, following the crowd and partying it up on the weekend? Guess again.

This particular strategist forecasted a spring 5% to 7% retrenchment in the markets, so in that regard, I am a touch surprised to see this timetable apparently sucked forward. The premise for my correction call was these four factors:

1. Bad, surprise-ridden underbelly of the U.S. economy. This underbelly is bringing indigestion to national retailers, and could impact the financials of transports (most notably logistics companies) in the first half of 2014.

2. Artificial expectations on an impending capital expenditure boom. "Flush" with cash or not, corporate America has given us no indication, either with actions taken on balance sheets or in earnings calls, which they are poised to reinvest aggressively for the future. All of the language I hear is a "focus on productivity" and "restructuring benefits." Companies appear content to sit on low-yielding cash (most of which is held overseas) or use it to line the pockets of execs nearing the end of an employment contract via share repurchases.

3. Slowing growth in emerging markets. I tend to make a call on emerging markets looking through the lens of year over year sales growth rates for retailers, such as Coach (COH), Tiffany (TIF), Ralph Lauren (RL) and Nike (NKE). While still handily outperforming relative to the U.S., sales growth rates are moderating in emerging markets and when that transpires, it often leads to profit-busting inventory excess. Obviously, the market sniffs that out today.

4. The market expects a smooth transition from Ben Bernanke to Janet Yellen. The latter, after all, championed communication efforts with global markets.

Here is the deal leading up to the Federal Reserve meeting.

My equity coverage universe for Belus Capital Advisors is skewed 75% underweight, 15% overweight and 10% neutral. I have suggested to clients to have more cash on hand until what is unfolding in the markets stabilizes, or is priced into stocks. What am I watching: consumer staples.

We haven't seen a rotation into the often alleged safehaven consumer staples based on the rise in fear. That would suggest continued selling in the near term until we start to see a rotation in dividend payers.

Below is a one-week performance of the Dow Jones Consumer Staples components. Forget the notion the stocks "relatively outperformed"; they still logged losses last week.

Source: The Wall Street Journal

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