Summary & Key Takeaways
The long-term outlook for stocks remains questionable, as most of my leading indicators of risk assets suggest sub-par performance over the next year or so.
Importantly, the attractive yields on offer afford investors the ability to be paid to wait.
Shorter-term however, there remains potential for stocks to move higher in spite of all these long-term fundamental headwinds.
Investors will do well to continue to use any rallies to take profits and reduce high-beta equity exposure.
For a long-term investor, now is not the time to be overweight equities
Markets these days are so focused on short-term fluctuations and narratives we often lose sight of the big picture. To assist myself in sifting through all of this noise and key to assessing my allocation to stocks on a cyclical basis in my leading indicator dashboard. This comprises of a number of key measures of market internals, speculation, positioning, sentiment, macro and liquidity variables, as well as financial conditions that help determine when it is safe to buy-and-hold the broad stock market, and when it is not.
As has been the case for some time now, we remain stuck between a very bearishly positioned market that wants to rally (in the form of favourable market internals and bearish positioning), and a swath of headwinds that do no support stocks (the business and liquidity cycles, monetary conditions, higher yields etc.). Regardless of the potential for further gains over the short-term (as I will discuss later), I continue to find it increasingly difficult to justify any meaningful allocation to the broad US stock market (outside of tactical trades) given the number of material headwinds that remain.