Value Line, the well known stock picking digest, has turned more bearish on U.S. equities than at any point in the last 10 years. The company is telling subscribers to pare back equity exposure to just 60%-70%. That’s a low figure for most Wall Street research firms. MarketWatch reports:
“according to one top-performing newsletter, there’s been too much of a good thing in the stock market since this rally began last March.The newsletter is the Value Line Investment Survey, which is in a tie for first place for risk-adjusted performance over the three decades the Hulbert Financial Digest has been monitoring the investment newsletter industry.
In its Aug. 21 issue, which was emailed to subscribers early Monday, Value Line reduced its recommended equity allocation to the range of 60% to 70%.
This reflects a cautious to outright bearish posture on Value Line’s part, since the firm has never lowered its recommended allocation to below 50%. The last time it was lower than it is now was October 2000.?
Value Line’s rationale for lowering its recommended equity allocation was not that the economic and financial news is about to take a big turn for the worse, however. Instead, the firm’s concern is that the stock market has rallied so far, so fast, that it has gotten too far ahead of itself.
“The equity market’s relatively high level assumes a lot of things going right within the economy,” Value Line wrote in its issue received Monday morning. “If some of these things go wrong, the reaction could be swift and severe.”
That was written before Monday’s stock market rout, of course. But the market’s sell-off would appear to be a good illustration of the phenomenon: The major reason given for the sell-off was not bad economic news but the mere fact that overseas stocks markets fell.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.