Breakout

3 Reasons for a Market Pause: Hugh Johnson

Jeff Macke
Breakout

He's a long-term bull but Hugh Johnson, the eponymous head of Hugh Johnson Advisory has three good reasons for investors to take their time buying stocks right now. In the attached clip Johnson lays out why he expects a short-term pullback and tells us when he's going to start putting his money to work.

1. Time to Consolidate Gains

"Common sense is important in this business and the markets are up 14% since June 1st," says Johnson. "We're probably due for a pause."

Johnson isn't anthropomorphizing equities. A 14% run over four months removes the incremental buyer from the market. Everyone who wants stocks has likely gotten in and is looking to protect gains. Those who missed the move are inclined to wait for a pullback before buying.

On the margin stocks are about supply and demand. It's going to take time to rebuild demand and allow valuations to catch up to stocks.

2. Uncertainty

It's not just corporations inclined to wait for the election and Fiscal Cliff to be resolved that give Johnson pause. The fact is individual investors are facing the same problem. Both capital gains and dividend tax policies are in play. If it becomes clear that capital gains taxes are set to move higher, the smart move is to sell now and pay the lower rate. If you own dividend stocks, a hike in the dividend rate will reduce the value of the yield and thus the stock.

Under either scenario the smart move is to sell before the new year. The taxes may not go higher but there is little to no chance dividend and capital gains rates are going lower.

3. The Impact of Europe and China on U.S. Companies

Everyone knows Europe is a growing disaster and it's becoming clear that China is worse than they claim to be. Those are cogent observations but of little use to shareholders. Macroeconomics have a place in investing but the front line is where investors get real information.

Fortunately earnings season gives stock pickers a chance to hear straight from the horse's mouth what kind of impact the global sluggishness is having on profits.

"When you listen sort of anecdotally to company executives tell you how they're doing in China, how they're doing in Europe, you'll get a better handle on what earnings are going to look like for the next four quarters," says Johnson.

"I would drag my feet in putting on new positions," he concludes. A 3% decline would bring us back to what he regards as fairly valued. He's crossing his fingers, hoping the pullback reaches up to 6%, at which point stocks would once again become compelling.

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