You might be wondering how long it will take for a market top to develop. For a clue, I’m watching the parallels between our current episode and several bull markets of yesteryear, especially the big New Deal run of 1932-37.
Like ours, the 1930s bull took place in the context of near-zero interest rates and a deeply troubled economy (the Great Depression). From the bottom in July 1932 to the top in March 1937, the upswing lasted 56 months.
Our present bull has now continued 49 months. Therefore, I would guess that in terms of time, the up phase of the cycle is between 80% and 90% complete. From now on, you should be thinking increasingly about how to preserve the gains you’ve accumulated since 2009. You don’t want to give them back to the casino!
There’s no need to tear your portfolio apart and rebuild it. Instead, here are three kiddie-size modifications to put in place over the next two or three months:
- Trim your overall stock allocation to below your normal benchmark. In our Profitable Investing model portfolio, I consider 60% to 65% to be a normal equity weighting. We’re now at 50%. Let me emphasize: I do not advise selling all your stocks. People who take such an extreme measure seldom get back into the market at an advantageous level. The more radical the maneuver, the more likely it will prove to be unwise.
- Use “stock substitutes” for the slice of your portfolio that you take out of equities. At the moment, the most attractively priced substitute appears to be emerging-market debt.
- Buy only the handful of genuinely undervalued stocks left in today’s market. You’ll get plenty of openings to load up on equities (including stock mutual funds) later on, after a sizable “correction.” For now, slow your buying to a trickle. Focus on names with outstanding defensive attributes, such as a well-above-average dividend yield or a deeply depressed P/E ratio.
Some of the best defensive plays are to be found in the energy sector, particularly among the European oils. Even though North Sea Brent oil (the European benchmark) tends to be quoted at a premium to North American grades of crude, shares of the major European producers are selling at steep discounts to their U.S. peers.
If you’re a slightly more aggressive investor with an eye for capital gains, you might consider BP (NYSE:BP). CEO Bob Dudley, a native New Yorker elevated to the corner office in the wake of the 2010 Macondo oil blowout, has made great strides toward stabilizing the business. Most Macondo-related liabilities have been settled, and a breakthrough in the Justice Department’s pending civil litigation could, by itself, lift the stock 10% or more.
Better yet, Dudley has engineered a nimble exit from the company’s tense TNK-BP joint venture in Russia. In March, BP sold its half interest in the venture to state-controlled energy producer Rosneft (PINK:RNFTF), receiving $12.5 billion in cash and a 20% stake in Rosneft. With the cash, BP has launched a hefty $8 billion share buyback.
Despite all these budding positives, BP stock still trades at a wide discount to its stateside peers. Remember how I told you Royal Dutch Shell (NYSE:RDS.A, RDS.B) was cheap? BP sits on more proved reserves than Shell, yet BP’s market capitalization is — hold your hat — 37% lower than Shell. Talk about a fire sale!
While you’re waiting for Dudley to finish turning the ship around, BP will reward you with a juicy 4.78% dividend. Sure, there are risks here. But if my hunch is correct and BP pulls off a complete recovery, this stock could turn out to be one of our grand-slam home runs, with huge gains in store over the next three to five years.
Richard Band’s Profitable Investing advisory service helps retirement savers outperform the market without losing a minute of sleep along the way. His straightforward style and low-risk “value” approach has won seven “Best Financial Advisory” awards from the Newsletter and Electronic Publishers Foundation.