VRTX - Climbing A Wall Of Worry

2023-04-19 05:20:19 ET

Summary

• We are now climbing a wall of worry in the stock market.
• How “Climbing a Wall of Worry” rallies end.
• How to invest from now until the end of the wall of worry.

The stock market is often said to climb a wall of worry. This means that the market can continue to rise even in the face of negative news and economic uncertainty. This is because investors are willing to buy stocks when they believe that the long-term outlook for the economy is positive.

There are many examples of historical stock market rallies that have occurred despite a wall of worry. For example, in the early 2010s, the stock market rallied strongly even though there were concerns about the slowdown in China's economy. In the late 2000s, the stock market rallied strongly even though there were concerns about the European debt crisis. In the early 2000s, the stock market rallied strongly even though there were concerns about the 9/11 terrorist attacks and the global recession. In the late 1990s, the stock market rallied strongly even though there were concerns about the dot-com bubble. The stock market rallied strongly in the 1990s, even though there were concerns about the Y2K computer bug and the Asian financial crisis. In the early 1980s, the stock market rallied strongly even though there were concerns about the high inflation and interest rates at the time.

It is my opinion that this wall of worry is happening now. We have a great deal to worry about. Today's stock market is similar to the other historical wall of worry in that it is facing a number of challenges. These challenges include the ongoing COVID-19 pandemic, the war in Ukraine, the changes in China, and rising inflation. Additionally, the current bank crisis, office space crisis, and the US debt ceiling issue are concerns.

The Federal Reserve has been raising interest rates in an effort to combat inflation. This has led to higher borrowing costs for businesses and consumers. The inverted yield curve entices people to take their money from the banks that give them very low-interest rates to invest in bonds and money market funds. Also, some banks that have lent money to risky entities have a growing fault problem. This has been a driver of some banks having solvency problems.

The COVID-19 pandemic has led to a decline in demand for office space, as many employees are working from home. This has led to an increase in vacancies in office buildings, which could hurt the real estate market and weigh on the stock market.

The US government is currently running a budget deficit, which means that it is borrowing money to finance its operations. The debt ceiling is the maximum amount of money the government can borrow. If the debt ceiling is not raised, the government could default on its debt, which would have a devastating impact on the economy and the stock market.

The stock market rally will likely last a long time because the above worries are likely to dissipate over time. There are positive signs in the economy, such as strong job growth and corporate earnings. Central banks will be a big factor in how long this rally lasts. Central banks have often intervened in the stock market to provide liquidity and support prices. This has been done through a variety of measures, such as buying stocks, lowering interest rates, and providing other forms of financial assistance during economic stress. This time the primary issue is inflation and the Fed is raising interest rates to stop it.

The Fed's interest rate hikes can have a significant impact on economic growth. When the Fed raises interest rates, it makes it more expensive for businesses and consumers to borrow money. This can lead to a slowdown in economic activity, as businesses and consumers are less likely to invest or spend money. The Fed's interest rate hikes can also have a negative impact on the stock market. When interest rates rise, stock prices tend to fall. This is because investors are less willing to invest in stocks when they can earn a higher return on their money by investing in bonds or other fixed-income securities.

However, the Fed's interest rate hikes can also have some positive impacts on the economy. For example, higher interest rates can help to reduce inflation. Inflation is a measure of the rate at which prices for goods and services are rising. When inflation is high, it can erode the value of people's savings and make it more difficult for businesses to plan for the future. The Fed's interest rate hikes can also help to strengthen the dollar. When the dollar is strong, it makes it more difficult for foreign companies to compete with US companies. This can lead to an increase in US exports and a decrease in US imports.

How Do "Climbing a Wall of Worry" Rallies End?

However, no rally lasts forever. Eventually, the wall of worry will become too high for the market to climb, and the rally will end. There are a number of reasons why this might happen, including:

• The market becomes overbought. When stock prices rise too high, they become vulnerable to a correction. This is because investors are willing to pay more for stocks than they are worth, and eventually they will start to sell. A good example of this was the dot-com bubble of the late 1990s. During this time, investors were willing to pay high prices for stocks of technology and other companies, even though many of these companies were not profitable. The bubble burst in 2000, and the stock market lost a significant amount of value.

• Negative news events occur. Even if the market is not overbought, it can still fall if there are negative news events that cause investors to lose confidence. The 2008 financial crisis was a good example of this. The crisis was caused by a number of factors, including the collapse of the housing market and the subprime mortgage crisis. The stock market fell sharply during this time. News events including a recession, a war, or a natural disaster could all lead to a sell-off.

• Investors become complacent. When the market has been rising for a long time, investors can become complacent and start to take on more risk. This can lead to a bubble, which eventually bursts. For example, the stock market had been rising steadily for several years leading up to 1929, despite a number of warning signs, such as high levels of speculation and debt. On October 29, 1929, the market crashed, wiping out millions of investors and leading to the Great Depression.

It is important to remember that the stock market is cyclical, and it will eventually go down after it has gone up for a long time. There is no way to predict when this will happen, but it is important to be prepared for it. By understanding the reasons why markets climb walls of worry end, investors can make better decisions about when to buy and sell stocks.

How I am playing the wall of worry now.

I am staying diversified and keeping alert to anything that could stop this rally. I focus on what the environment will be like two years from now, especially with those sectors that are having problems now. For example, the banking sector is the elephant in the room, especially banks with less than 20 billion dollars in market cap. Now we are seeing several smaller banks having problems. Fed-induced rising interest rates are challenging all banks. A few of the bank stocks are land mines, but most of the stocks are gold mines. A little analysis to weed out the vulnerable is very important. I'm long JPMorgan ( JPM ), Truist Financial ( TFC ), and Regions Financial ( RF ) which have strong fundamentals and attractive valuations now and I expect they will be worth considerably more in two years.

Other examples of sectors that are expected to do poorly in a recession caused by rising interest rates include Industrials, Energy, and Real Estate. Like the banks, analysis is essential to doing well in these sectors for the next two years. These sectors are sensitive to the economic environment, and will likely suffer from slower economic growth. Additionally, the current supply chain disruptions could hurt these stocks. Of all the sectors, I would be most concerned with Real Estate.

Three industrial stocks I like are Caterpillar ( CAT ), United Rentals ( URI ), and Honeywell ( HON ). CAT is a well-positioned company with a strong track record of profitability and dividend growth. The company is well-positioned to benefit from the global infrastructure boom, and it is a good investment for investors looking for a defensive play in the event of a recession.

United Rentals is a leading provider of equipment rental services in the United States and Canada. The company has a strong track record of profitability and growth, even during recessions. In fact, URI's stock price has outperformed the S&P 500 in every recession since 1980.

There are several reasons why URI is a good investment even during a recession. First, the company's business is recession-resistant. URI's customers include construction companies, homebuilders, and other businesses that need to rent equipment for short-term projects. These businesses are still likely to need equipment even during a recession, as they will need to maintain and repair existing infrastructure and build new projects.

Honeywell is a well-positioned company with a strong track record of profitability and cash flow generation. The company is also a leader in many of its markets, and it is well-positioned to benefit from infrastructure spending. As a result, Honeywell stock is a buy for the next 2 years even if we have a recession between now and then. Honeywell is well-positioned to benefit from infrastructure spending, as the company provides a wide range of products and services to the infrastructure sector. For example, Honeywell provides air traffic control systems, building automation systems, and energy management systems. These products and services are essential for the operation of modern infrastructure, and they will be in high demand as countries invest in their infrastructure. In addition to its direct exposure to infrastructure spending, Honeywell also benefits from the indirect effects of infrastructure spending. When governments invest in infrastructure, it creates jobs and boosts economic activity. This, in turn, leads to increased demand for Honeywell's products and services.

Energy stocks that should do well over the next two years even through a recession are MPLX LP ( MPLX ), Phillips 66 ( PSX ), and EOG Resources ( EOG ). MPLX LP is a midstream energy company that owns and operates a network of pipelines, storage facilities, and other infrastructure assets. The company's business is relatively recession-proof, as it is essential for the transportation and storage of oil and gas products. Even in a recession, businesses and consumers still need to use energy, and MPLX is well-positioned to benefit from this demand. Low crude oil prices can actually help MPLX during a recession. This is because low oil prices lead to lower costs for MPLX, which can help to boost its profits. For example, MPLX's costs for transporting and storing oil are directly tied to the price of oil. When oil prices are low, MPLX's costs are also low, which can lead to higher profits. MPLX LP is a good investment for the next 2 years, even if we have a recession. The company's business is recession-proof, and low crude oil prices can actually help MPLX to boost its profits.

Phillips 66 is a well-positioned company to weather a recession. The company has a strong balance sheet, a diversified business model, and a track record of profitability. These factors make PSX a good investment for the next 2 years, even if we have a recession. The company has a strong dividend yield of 4.1%. The stock is trading at a relatively low valuation compared to its peers. The company has a history of growing earnings and dividends.

EOG Resources is a buy for the next 2 years even if we have a recession between now and then because it is a well-managed company with a strong balance sheet. EOG has a history of generating strong cash flow, even in down markets. The company has also been investing in new technologies that will help it to reduce its costs and become more efficient. In addition, EOG has a diversified portfolio of assets, which will help to insulate it from the effects of a recession.

Sectors that are expected to do well in a recession caused by rising interest rates are Consumer staples, Healthcare, Technology, and Utilities. Consumer staples are typically less volatile than other sectors and provide a steady stream of income. They could benefit from rising inflation, as consumers will be looking to buy more of these products. Examples of consumer staples stocks that I like include Conagra Brands ( CAG ), Kirin Holdings ( OTCPK:KNBWY ), and Walmart ( WMT ).

The healthcare sector is also relatively defensive and could benefit from the aging population. Additionally, the COVID-19 pandemic has accelerated the adoption of new technologies in healthcare, which could provide a boost to these stocks. Examples of healthcare stocks I like include BioNTech ( BNTX ), Pfizer ( PFE ), and Vertex Pharmaceuticals ( VRTX ).

The technology sector is often seen as a growth sector, and it could benefit from the continued adoption of new technologies. Additionally, the current economic environment could lead to more innovation, which could benefit these stocks. Examples of technology stocks I like include Alphabet Inc. ( GOOGL ), Broadcom ( AVGO ), and Axcelis Technologies ( ACLS ).

Utilities: These stocks provide essential services, such as electricity and water, and they are typically less volatile than other sectors. They could benefit from rising inflation, as consumers will be looking to conserve energy. Examples of utility stocks include American Electric Power ( AEP ), Enel SpA ( OTCPK:ENLAY ), and Duke Energy ( DUK ).

Summary

I believe that the stock market will continue to climb this wall of worry. This is because the long-term outlook for the economy is positive. The US economy is still the largest and most powerful economy in the world. It has a strong consumer base, a diverse economy, and a stable political system. Additionally, the US is a leader in innovation and technology. These factors will continue to drive economic growth in the long run. Of course, there are no guarantees in the stock market. There will be ups and downs along the way. However, I believe that the long-term trend for the stock market is up. If you are a long-term investor, I believe that you should stay invested in the stock market.

For further details see: