Equity Markets: A Crowded Trade

Terry Flanagan

An economic turnaround may propel positivity for the equity markets, but investors are weary of reactionary “crowded trades.”

Last week, retail sales reported higher than expected numbers resulting from robust Thanksgiving, Black Friday, and Cyber Monday sales. Such events have propelled a positive notion of consumer confidence for some market participants. The U.S. economy may be recovering, but not without fragmentation.

“Whether a strong sense of consumer confidence will last is the million dollar question,” said Steve Wood, chief market strategist at Russell Investments. “There seems to be a disconnect between consumer confidence and stubborn jobless rates, and low housing numbers.”

Undoubtedly, companies are one of the leading facets of the economic recovery—which may continue to be spurred from a strong consumer, as last week’s sales show. As corporate profits continue to reign supreme, investors may look forward to receiving rewards such as dividends.

Equity market investors, generally speaking, may witness more IPOs (initial public offerings), which traditionally spike when corporations are performing well.

“Dividends that come from high quality names are becoming a crowded trade,” Wood told Market Media. “But, that doesn’t mean they shouldn’t be in your portfolio.”

Whether more dividend payouts are on the horizon for early 2012 remains to be seen, but Wood predicts a high probability of “volatility,” stemming from various global macroeconomic issues.

Macro troubles, compared with solid fundamentals may be hard to reconcile for some investors.

“In terms of portfolio construction, we’re recommending our clients to stay with a long term perspective to overcome the volatility that will likely continue in 2012.”

Many of the current ill effects of the troubled, global economy will smooth over, however, noted Wood.

“There are no risk-less assets these days, but the dark clouds of Europe will pull back,” he said, noting investors to remain keen on “global diversification.”

On November 30, the Russell 3000 consumer discretionary sector returns was up 3.3%; the Russell 3000 retail subsector returns, up 1.7% from November 29 reports of 0.1% and 1.2% respectively.

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