Tony Dwyer thinks investors ought to be a lot like skiers when navigating the U.S. equity market’s current downtrend: Don’t be defensive on the terrain, because leaning back is only going to make you come unglued. Instead, the steeper it gets, the more aggressive you ought to be.
Mr. Dwyer, a New York-based strategist at Canaccord Genuity, has been expecting a 5% to 10% correction in U.S. equity markets awaiting an initial rate hike in the U.S. Federal Reserve in June. He thinks last Friday’s payroll report convinced many others of the same thing, as bond yields surged and equities weakened broadly.
“Much like a black diamond in Jackson Hole, when peering within the edge of a steep correction, it seems pretty impossible to think we could navigate it safely, and we want to lean back and obtain defensive,” Mr. Dwyer told clients. “The issue with getting defensive is the reason for correction – higher Fed and market rates – should make the higher yielding defensive areas to underperform.”
In short, the correction could get ugly, but a positive fundamental outlook should prevent investors from getting too defensive.
Nonetheless, Mr. Dwyer recommends that investors lighten on any big sector bets and have a more market neutral stance awaiting becoming more aggressive because the selloff worsens.
“Ultimately, the typical market peaks eight months just before recession, so one shouldn\’t expect ‘the’ market peak until a recession becomes increasingly probable, and for that reason corrections – even nasty ones – ought to be bought,” he explained.