Despite a significant amount of volatility and uncertainty in the real economy stemming from the coronavirus pandemic, stocks continue to surge to near all time highs and valuations remain elevated.
With stocks continuing to outperform, value investors may be discouraged at the relative lack of opportunity available today to pick up stocks that are cheap.
A number of stocks and sectors that appear cheap today could be dangerous, and a number of analysts and market pundits have pointed to the potential for higher occurrences of value traps in the stock market today.
Owning such value stocks in a rapidly increasing market has turned out to be an underperforming strategy over the past decade, as capital continues to flow to the highest quality companies with the best balance sheets and future growth opportunities, driving the valuations of this collective group to higher and higher levels, largely at the expense of what many investors may think are value stocks.
Any company that requires a “fix” to survive or thrive may be in trouble, should bailouts/stimulus measures run out or economic conditions worsen further. We’re not through this pandemic yet, so investors looking through to earnings from three or four quarters from now could be in for a rude awakening if we see a multi-year pandemic stretch much longer than anticipated.
For those looking to stay invested, I’d encourage sticking with the highest-quality companies with the best balance sheets for now, until we have greater clarity in to how stable the real economy will be moving forward.
Invest wisely, my friends.
