THE BOTTOM LINE: The secret recipe for new stock records and the market's biggest fears

This week:

  • Business Insider executive editor Sara Silverstein discusses how the stock market has been turned upside down in September. The stocks that were the best year-to-date performers through August have been the worst in September, while those with the weakest returns over the first eight months have led the way higher. A similar complete reversal can also be seen at the sector level, with market-leading tech and healthcare stocks giving way in this month to energy and telecom. This rotation has helped propel US stocks to new records. It seems that whenever the equity market loses a driver of gains, another is ready to step up and take its place.
  • Business Insider deputy executive editor Matt Turner speaks to Mike Ryan, the chief investment strategist for UBS Wealth Management Americas, about what keeps him up at night. He says that he’s most worried about a policy mistake from central bankers, and that his concern is compounded by the fact that current monetary policy is entirely unprecedented. Ryan notes that central banks around the world have greatly expanded their balance sheet, and highlights the challenge around what happens when they unwind that.
  • Turner chats with Dennis Ruhl, chief investment officer of JPMorgan’s US behavioural finance equity group, about his greatest market fears. Ruhl expresses concern over the unwinding of quantitative easing, as well as political developments that could inject volatility into the market. He says the market headwind that has the greatest likelihood of materialising is the natural ageing of the current cycle, as wages and interest rates rise.
  • Mark Haefele, global chief investment officer of UBS Wealth Management, tells Turner that he’s most worried about what happens with interest rates and inflation. He also notes that while many geopolitical developments have a short-term effect before being quickly forgotten, the North Korea situation could be different, and is a threat worth taking seriously.
  • Silverstein speaks with Turner about his biggest takeaways from the recent UBS CIO Global Forum, where he chatted with eight investment officers. According to him, they all share the view that the stock market is fully-valued, if not slightly expensive, but that there isn’t any imminent downside risk due to overconfidence.
  • Turner also addresses recent comments from Fidelity’s director of global asset allocation research Lisa Emsbo-Mattingly, who noted that the US market may be overdue for a 5% correction, since we haven’t gotten one in about a year and a half. Asked about whether investors have been buying as the stock market has hit new highs, Turner cites a behavioural strategist who says that when the market is grinding higher, people don’t want to miss out. He also notes the subdued reaction the market has seen when faced with headline risk, such as developments out of North Korea.
  • Silverstein sits down with Sarah Hunt, a portfolio manager at Alpine Funds, which oversees $US4 billion, and discusses why she’s bullish on energy stocks. Hunt says there’s been a change in discussions around oil, and says she expects to see oil demand higher than supply for the first time in years. She notes that this is very helpful from a sentiment standpoint. In terms of energy stock valuations, she says that companies will start to look more attractive once oil prices rise, enhancing cash flows. Hunt also highlights how energy producers have succeeded in cutting costs, and says higher oil prices translate to more sustainable dividends.
  • Hunt goes on to talk about whether stocks are overvalued, and says that the anticipation of a correction makes it less likely to happen in the near term. She notes that while the Fed is unwinding its balance sheet, other central banks around the world are still expanding theirs, which should help equity markets continue to perform. Hunt envisions stocks being the default place where investors go.
  • Silverstein asks Hunt about the potential effects of tax reform, and says sentiment has changed, so now policy progress will be treated as a positive catalyst. She says that lower corporate tax rates will be better for earnings and cash flow.
  • Hunt outlines what she sees as the best opportunities in the market, and highlights consumer staple stocks, which have underperformed lately. She likes the dividend yields they offer, and says valuation levels for the sector are getting more attractive. Hunt argues that investors have been ignoring value stocks as they pursue growth, and says that’s created opportunity. On a single-stock basis, Hunt mentions JM Smucker’s as a company she likes.

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