Let\u2019s face it \u2013 this bull market is old. Very old. And forgive me for being harsh, but it also might die soon. While I don\u2019t believe bull markets die of old age, I do think that the longer an economic and market growth cycle runs, the more vulnerable it becomes to fundamental breakdowns \u2013 tightening credit conditions, massive waves of debt defaults, inflation pressures, geopolitical conflicts, just to name a few.<\/p>\n
I\u2019m not saying it\u2019s time to go defensive. But I do think it could make good sense for investors to begin considering how to posture portfolios for a late cycle, mature bull market. In my opinion, that means shifting your portfolio management mindset to focus on quality.<\/p>\n
Why Quality, and What Does that Mean?<\/strong><\/p>\n Perhaps the best way to grasp the \u2018quality\u2019 concept is to think in high-level terms about how different types of stocks perform at different times in a market cycle.<\/p>\n Generally speaking \u2013 and based on my own experience \u2013 I\u2019ve have found that small-cap stocks tend to outperform early in an economic cycle. In my view, this happens as capital and liquidity return to the marketplace, and as \u2018animal spirits\u2019 drive fresh investment, spending, and risk taking. I think domestic, small-cap stocks tend to benefit the most in this environment, and from the strong spurts of growth that tend to occur right after a recession ends.<\/p>\n As an economic expansion hits stride and eventually matures, we often find that credit starts to tighten, margins start to fall as costs rise, and consumers start to spend less \u2013 all factors that hurt small-caps, in my view. When the economy starts to see those types of changes \u2013 which I would argue is taking place today \u2013 it makes companies with stable earnings, healthy cash flows, and strong balance sheets look attractive by comparison. And that\u2019s what I mean by \u2018quality.\u2019<\/p>\n For investors, looking for quality stocks means analyzing companies for three features, in my view:<\/p>\n Many long-term dividend paying stocks tend to fall in these categories, and often times it means buying \u2018boring\u2019 stocks that may not offer the most attractive risk-adjusted returns. At the end of the day, however, boring doesn\u2019t matter if the company is positioned to succeed over the long-haul. Having strength in all three categories above means a company can survive \u2013 and even potentially do well \u2013 in adverse macroeconomic conditions, in my view.<\/p>\n An at-a-glance look at this bull market bears out this small-cap versus quality argument. In the first full year of this bull market, 2010, small-cap1<\/sup> was among the best performing categories of stocks, delivering a return of +26.9%. \u2018Quality\u2019 stocks, as defined by MSCI,2<\/sup> also did well (+12.6%) but not nearly as good as small-caps.3<\/sup><\/p>\n Fast forward to 2017, which again I would argue brings us to the final innings of this bull market, and we see a near-symmetrical reversal of leadership. Last year, quality stocks returned +26% while small-caps were up +14.6%. In my view, this shift in leadership happened as investors have shifted on the risk spectrum to favor more earnings-reliable, larger-cap corporations. A trend I think could continue in 2018.<\/p>\n Bottom Line for Investors<\/strong><\/p>\n This shift to focus more on quality may not involve the need for wholesale changes to a portfolio strategy \u2013 a well-diversified portfolio should probably already have several quality names in it. But, it could warrant a fresh review of their portfolio holdings, to see if the companies you own are positioned to do well in more difficult macroeconomic conditions. Sometimes the best offense is a good defense.<\/p>\n To help you get a deeper look into how your portfolio stands in the market\u2019s current landscape, we are offering all readers our Just-Released Stock Market Outlook Report4<\/sup>. Click on the link below to download it today.<\/strong><\/p>\n","protected":false},"excerpt":{"rendered":" Let\u2019s face it \u2013 this bull market is old. Very old. And forgive me for being harsh, but it also […]<\/p>\n","protected":false},"author":3,"featured_media":7430,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[63,71],"tags":[],"class_list":["post-7604","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-mitch-on-the-markets","category-private-client-group"],"acf":[],"_links":{"self":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/7604","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/comments?post=7604"}],"version-history":[{"count":1,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/7604\/revisions"}],"predecessor-version":[{"id":10873,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/7604\/revisions\/10873"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/"}],"wp:attachment":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/media?parent=7604"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/categories?post=7604"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/tags?post=7604"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}\n