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It’s Too Expensive to Be Defensive: Dempsey


If Macy's put signs in its windows, suddenly announcing that everything was 25% off, people would be lined up in the street looking to take advantage of the deal. On Wall Street however low prices seem to be a deterrent. Right now the safest assets continue to be priced up, while riskier investments are being ignored. In short, it's become very expensive to be defensive.

"It's so illogical; why would investors afford Utilities (XLU) a higher P/E than Tech stocks (XLK)?" asks Ed Dempsey, chief investment officer at Pension Partners in the attached video. "The reason is, they're obviously just afraid of markets."

And it's not just the stock market. Bond markets at home and around the world are also pushing the limits on price.

"It feels terrible. It really does. It feels really bad" says Dempsey of the current state of unease that has fueled the aversion to risk. "Investors have positioned inside the stock market for a crash that has not happened."

And therein in lies the opportunity, he says, pointing out that the time to veer away from this fear-based distortion is now. "The real money to be made is in that turn, in the turn away from awarding something like utilities a higher P/E than tech. When that turn comes, there's a lot of room to run," he says.

But for all this perceived upside and opportunity, in the short-term, defensive sectors like Telecom (IYZ) and Utilities have trounced the S&P 500 (^GSPC) over the past 3 months on price alone. Add in dividends of 3% to 5% and it's not even close.

Even so, every trend has limits and at some point the clouds over Europe and China will subside and the appetite for risk will come back. The trick is not only being able to spot the turn, but having the conviction to buy risk assets when they're inexpensive and out of favor.

"Watch for the turn in the Cyclicals (^CYC) and Materials (XLB)," Dempsey says, "they might tell you that the next up leg is coming in equities."