Investors can ignore the Fed and the economic data when they consider where to allocate their funds in the coming months, said Michael Shaoul, chairman and chief executive officer at Marketfield Asset Management LLC.
The Fed is way behind the curve and the equity market certainly understands that. At some point the Fed will wake up to the reality, which will probably be the first quarter of next year. The real danger right now seems the possibility of the bond-market reacting ahead of the Federal Reserve. That may result in the rerun of a situation witnessed earlier, i.e. a big reallocation of assets out of fixed-income. That’s something that needs to be watched very carefully, Mike said.
A lot of value investors have decided to sell out after equity indexes hit all time high and hoard cash. Many mutual fund and Private Equity managers have decided to liquidate their equity holdings. Asked to comment, Mike said it’s a wonderful time to exit equities if the investor bought his stocks 3-4 years ago. The current bull-market has reasons against the backdrop of people trying to ignore how strong it has been. At the moment anybody who says investors need to stay out of the market is congratulated for being prudent.
The only time when he would be worried about the bull-market is when somebody says investors need to stay out of this market and everybody laughs at him. The equity market is not there yet. However, the bond market looks extremely expensive and it’s mathematically impossible for bonds to give an adequate return. So fixed-income is the asset class that investors need to get out of, and not equities, he argued.
Michael believes investors should avoid emerging markets and stay put in developed markets; in businesses that have pricing power. The airlines industry has recently published its quarterly earnings report amid talks of fare hikes. The fundamentals of these companies have been improving on rising fares, though one of the pitfalls going forward could be unions negotiating higher wages for the employees.
Asked to comment on it, Michael said as a general rule one should be in an industry where capacity is being taken out and the airlines certainly fit that point. The key-point is wage pressure is going to become an issue and one needs to be careful about companies that have wages as a significant percentage of their operating costs.
Investors didn’t really have had to worry about wage pressures since the beginning of the current bull market. The unions are waking up to that and tightness is appearing in certain regional labor markets, in specific industries. So investors need to be careful about input costs, he observed.
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