Economist to investors: Be ready for downturn around the corner

BNP Paribas senior economist Bricklin Dwyer explains why the market's mood is "euphoric nervousness" and how investors should react

Posted: Jul 26, 2018 11:26 AM
Updated: Jul 26, 2018 11:26 AM

The bull market is back, even as tariffs eat into companies' profits.

The S&P 500 is rapidly closing in on an all-time high. It's less than 1% away from the record set in January before rising interest rates freaked out investors.

The comeback hasn't been driven by bargain-hunting investors scooping up stocks on the cheap. Since the market bottomed in early April, the hottest stocks have been the priciest ones.

The 50 S&P 500 stocks with the highest trailing price-to-earnings ratios have soared by about 13% over that span, according to Bespoke Investment Group. That's about six times the gain of the stocks with the lowest valuations.

Why are people piling into the most expensive corner of the market?

It could be a sign that investors are flocking to the highest-quality stocks -- ones that offer safety from tariffs and the risk that the roaring economy will slow down. But that safety comes at a price: higher valuations.

"This is exactly the time in the cycle that you would expect to pay up for high-quality companies," said Richard Turnill, BlackRock's global chief investment strategist. "This is not unusual as cycles mature."

Related: Investors are preparing for a downturn

High-quality companies are ones that have sturdy balance sheets and a strong track record of growing profits. They should be better positioned to survive a market storm than ones with high levels of debt and volatile earnings.

Bespoke's analysis found that it wasn't just expensive stocks that were leading the market comeback. Other winners included stocks that have strong ratings from analysts and high levels of institutional ownership. In other words, they're higher quality.

"Quality has performed extremely well," said Turnill.

Even though the bull market may be back on track, risks abound. The Federal Reserve continues to gradually raise interest rates from the extremely low rates that investors became addicted to. That added turbulence to the market, including currency crashes that have rocked emerging markets like Argentina and Turkey.

Related: Why investors shouldn't worry about rising rates

Meanwhile, the United States and China, the world's two largest economies, are in a trade war with no end in sight. Washington is also clashing with the European Union, Mexico, Canada and others on trade.

The trade fights threaten to derail blockbuster corporate earnings as well as the US economy, which economists expect grew at a very strong pace of 4% or higher during the second quarter.

An escalation of trade tensions -- new tariffs on $2 trillion of trade flows -- will slash global growth by 0.4% in 2019, Fitch Ratings predicted on Wednesday.

"Economic uncertainty has increased materially," said Turnill. "You still want to be in risk assets, but you need to focus on the more resilient areas of the market."

New York Coronavirus Cases

County data is updated nightly.

Cases: 2514422

Reported Deaths: 56038
CountyCasesDeaths
Kings33302810840
Queens31485510285
Suffolk2388013596
Nassau2139053290
Bronx2073266748
New York1677674635
Westchester1434812338
Erie1057911944
Richmond887311933
Monroe838301183
Orange57344909
Rockland52979779
Onondaga51689758
Dutchess35490497
Albany30633388
Oneida28461585
Broome24233404
Niagara23884397
Saratoga20111198
Ulster17224278
Schenectady16592227
Rensselaer14692167
Putnam1244896
Chautauqua12318174
Oswego11556112
Chemung10798154
St. Lawrence10424126
Steuben10037173
Ontario9296110
Jefferson874874
Cayuga8613107
Sullivan843183
Wayne810384
Cattaraugus7622113
Genesee6945132
Herkimer6741128
Clinton666538
Tompkins647559
Fulton6258102
Madison6138102
Montgomery5890139
Livingston568071
Warren540782
Cortland531379
Tioga503671
Columbia4984111
Chenango465786
Allegany457196
Washington456467
Otsego454154
Greene435386
Wyoming434958
Orleans429487
Franklin423320
Lewis357138
Delaware352947
Seneca272563
Schoharie227721
Essex226831
Yates161028
Schuyler152417
Hamilton4353
Unassigned14826
Out of NY0311
Utica
Mostly Cloudy
60° wxIcon
Hi: 68° Lo: 51°
Feels Like: 60°
Oneonta
Partly Cloudy
59° wxIcon
Hi: 69° Lo: 49°
Feels Like: 59°
Herkimer
Mostly Cloudy
60° wxIcon
Hi: 71° Lo: 52°
Feels Like: 60°
Old Forge
Partly Cloudy
60° wxIcon
Hi: 67° Lo: 48°
Feels Like: 60°
WKTV Radar
WKTV Temperatures
WKTV Severe Weather
Game Day Deals - New Deals Each Week
Chapter Aesthetic October Giveaway
Cool To Be Kind 2021
Looking for work or looking to hire? Check out the WKTV Job Fair!
Saluting Those Who Are Proud 2 Serve