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After May Swoon, What’s Next?—Searching for Alpha for June 2012
Following stocks’ dismal performance in May, what’s next for the markets over the next few months?
Stocks turned in their worst monthly performance in two years in May. Our last Searching for Alpha newsletter on AdvisorOne mentioned that stocks were overbought and that a sell-off was a bit overdue. So what's next? Here are a few thoughts on the next few months.
(1.) When it's time to re-enter the markets, the best entry point will likely be in U.S. equities.
Even though European bourses have taken the brunt of the market damage, analysts have been cutting earnings estimates so aggressively that the Continent's P/Es have barely budged. That's not the case in the U.S., and the sharp drop in the last month should set the stage for a good buying opportunity in the mid- to late summer.
(2.) Having said that, the time to re-enter the markets is not quite here.
There will likely be rallies and drops along the way, but until a more cohesive strategy to further unite the EU economies is agreed on, the general direction of stocks will most likely be lower.
(3.) Once there is further visibility on Europe's plan, expect sovereign debt to take a nosedive.
Global Treasury securities are at levels that make no sense; with even the hint of inflation, most durations will produce negative real yields. I expect the equity and fixed income markets to head in opposite directions when stocks finally find a bottom.
About the Author
Ben Warwick, Quantitative Equity Strategies
Veteran investment strategist Ben Warwick brings 20 years of investment management expertise to AdvisorOne.com in his blog, Searching for Alpha. His market and economic insights provide readers with an insider’s view on generating alpha through asset allocation, the use of strategic portfolio “tilts” and alternative investments.
Ben Warwick founded Quantitative Equity Strategies (QES) in 2002 as a platform for implementing his quantitative investment strategies. The firm manages assets with traditional long-only equity and fixed income, private equity, managed futures and alternative investment mandates. QES has developed an industry leading expertise in building investment programs that can replicate alternative returns, while offering daily liquidity and transparency. These products include the HFRq, a hedge fund replication strategy developed in concert with Hedge Fund Research in Chicago; the Managed Futures Beta Index, with Aspen Partners; and the Nomura QES Modeled Private Equity Returns Index (PERI), which was developed with Nomura Bank and Preqin, the leading source of information in the private equity industry.
He is the author of several books, including "Searching for Alpha: The Quest for Exceptional Investment Performance," (Wiley, 2000) and "The Handbook of Managed Futures," with Carl Peters, (McGraw-Hill, 1996). He can be reached at ben@qesinvest.com.
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