IntroductionYou’ve probably heard that the US stock market has been on a tear lately, reaching new all-time highs almost every week. The S&P 500 index, which tracks the performance of 500 large US companies, is up more than 20% year-to-date, and more than 100% since its low in March 2020. That’s an impressive feat, considering that we’re still in the midst of a global pandemic, geopolitical tensions, and inflation worries. But is this rally sustainable? Can the market keep climbing higher and higher, or is it due for a correction soon? And more importantly, what does this mean for you as an investor? How should you position your portfolio to take advantage of the opportunities and avoid the risks? Morgan Stanley's chief US equity strategist Mike Wilson believes that the stock market's rally is likely running out of steam, and quickly. He cites both technical and fundamental reasons for this. On the technical side, Wilson notes that market breadth — or the share of stocks participating in the rally — is still weak. He also points to the fact that the equal-weighted S&P 500 index is underperforming drastically compared to the market-cap-weighted index. This suggests that the rally is being driven by a small number of large stocks, rather than a broad-based advance. On the fundamental side, Wilson is concerned about "real" consumer spending growth, which he believes will dip negative year-over-year in the fourth quarter of 2023. This is a major concern, as consumer spending is a big driver of earnings and economic growth. Assessing the Longevity of the Stock Market Rally: A Dual Analysis ApproachAlright, let’s get started. To answer the question of whether the stock market rally is coming to an end, we need to look at both the technical and fundamental aspects of the market. Technical analysis is the study of price patterns, trends, and indicators that can help us gauge the sentiment and momentum of the market. Fundamental analysis is the study of the underlying factors that affect the value and performance of companies and the economy. Let’s start with the technical side. One of the most common ways to measure the strength of a market rally is to look at its breadth. Breadth refers to the number or percentage of stocks that are participating in the rally. Ideally, we want to see a broad-based rally, where most stocks are moving up together. This indicates that there is strong demand for stocks across different sectors and industries, and that investors are confident about the future prospects of the economy. However, if we look at the current state of the market breadth, we see a different picture. Market breadth is still weak. Only 44% of S&P 500 stocks are above their 200-day moving average, which is a long-term trend indicator. This means that more than half of the stocks in the index are lagging behind or even declining. The equal-weighted S&P 500 index, which gives equal importance to each stock regardless of its size, is underperforming drastically compared to the market-cap-weighted index, which gives more weight to larger stocks. This suggests that the rally is being driven by a small number of large stocks, rather than a broad-based advance. This is not a healthy sign for the market. It implies that investors are flocking to a few safe-haven or high-growth stocks, while ignoring or selling off other stocks that may have lower valuations or higher risks. It also means that the market is vulnerable to a sharp reversal if these few large stocks start to falter or disappoint. Preparing for a Market Shift: What Slowing Consumer Spending Means for InvestorsNow let’s turn to the fundamental side. Fundamental analysis looks at the factors that affect the earnings and growth potential of companies and the economy. These include things like consumer spending, corporate profits, interest rates, inflation, government policies, etc. One of the most important drivers of earnings and economic growth is consumer spending. Consumer spending accounts for about 70% of US GDP, and it reflects how confident and willing consumers are to spend their money on goods and services. Consumer spending also has a ripple effect on other sectors of the economy, such as manufacturing, transportation, retailing, etc. However, consumer spending growth is likely to slow down significantly in the coming months. He believes that “real” consumer spending growth, which adjusts for inflation effects, will dip negative year-over-year in the fourth quarter of 2023. This would be a major drag on earnings and economic growth. Why does he think so? Well, there are several reasons for this pessimistic outlook. First, he cites the fading impact of fiscal stimulus, which boosted consumer spending earlier this year with direct payments and enhanced unemployment benefits. Second, he cites the rising inflation, which erodes consumers’ purchasing power and reduces their real income. Third, he cites the delta variant of COVID-19, which poses a threat to public health and economic activity, especially in areas with low vaccination rates. All these factors combined could dampen consumer confidence and spending, and lead to a slowdown or even a contraction in the economy. This would also hurt corporate profits and stock prices, especially for those companies that rely heavily on consumer demand. So, what does all this mean for you as an investor? How should you prepare for the possible end of the stock market rally? Well, Wilson has some suggestions for that as well. He recommends that investors turn to “defensive growth stocks” as well as industrials and energy sector stocks. He believes that these sectors will outperform in a late-cycle environment. Exploring Defensive Growth Stocks: A Strategy for Steady Gains in Uncertain TimesDefensive growth stocks are stocks that have strong and consistent earnings growth, regardless of the economic conditions. These are typically companies that provide essential or in-demand products or services, such as healthcare, technology, or utilities. These stocks tend to be more resilient and less volatile than other growth stocks, and they can also benefit from higher inflation and interest rates. Industrials and energy sector stocks are stocks that are sensitive to the business cycle and the global economy. These are typically companies that produce or transport goods, such as machinery, equipment, materials, or oil and gas. These stocks tend to perform well when the economy is expanding and demand is high, and they can also benefit from higher inflation and commodity prices. Wilson thinks that these sectors will offer better returns and lower risks than the broader market in the near future. He argues that defensive growth stocks will provide steady growth and protection against a slowdown, while industrials and energy sector stocks will provide cyclical exposure and inflation hedge. Of course, these are not the only sectors or strategies that you can consider. There are many other factors that can affect the performance of different stocks and sectors, such as valuation, quality, momentum, dividend yield, etc. You should always do your own research and analysis before making any investment decisions. Invest Smart: Three Singapore Stocks with Strong Earnings Growth and Low PB RatiosI found some possible defensive growth stocks on the Singapore stock exchange that you may want to consider investing in. These are stocks that have strong and consistent earnings growth, regardless of the economic conditions. They also have a price-to-book (PB) ratio of less than 1, which means that they are trading below their net asset value. SATS Ltd (SGX:S58): SATS is a leading provider of food solutions and gateway services in Asia. It serves the aviation, hospitality, healthcare, and other sectors. It has a PB ratio of 0.9 and an expected earnings growth of 72.9% for 2023. It also pays a dividend yield of 0%. SATS has been resilient during the pandemic, as it diversified its revenue streams and expanded its regional presence. It is well-positioned to benefit from the recovery of air travel and tourism in the future. AEM Holdings Ltd (SGX:AWX): AEM is a global leader in the design and manufacture of advanced test and measurement solutions for the semiconductor industry. It has a PB ratio of 0.8 and an expected earnings growth of 43.1% for 2023. It also pays a dividend yield of 0%. AEM has been growing rapidly, as it secured new customers and orders, and invested in research and development. It is poised to capture the growing demand for semiconductors in various applications, such as 5G, artificial intelligence, cloud computing, and electric vehicles. Jardine Matheson Holdings Ltd (SGX:J36): Jardine Matheson is a diversified conglomerate with interests in various sectors, such as property, retail, automotive, engineering, construction, insurance, and hospitality. It has a PB ratio of 0.6 and an expected earnings growth of 34.7% for 2023. It also pays a dividend yield of 4.6%. Jardine Matheson has a long history and a strong reputation in Asia. It has been adapting to the changing market conditions and consumer preferences, and pursuing strategic initiatives to enhance its value and growth. ConclusionThese are just some of the defensive growth stocks that you can find on the Singapore stock exchange. Of course, you should always do your own due diligence and research before making any investment decisions. You should also consider your risk appetite, investment objectives, time horizon, and portfolio diversification. That’s all for today’s episode of “The Investing Iguana”. I hope you enjoyed it and learned something new. If you did, please give this video a thumbs up, share it with your friends and family, and subscribe to my channel for more videos like this. And don’t forget to leave a comment below and let me know what you think of the stock market rally, and what stocks or sectors you’re investing in right now. Thank you so much for watching, and I’ll see you next time on “The Investing Iguana”. Until then, stay safe, stay smart, and stay invested.
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