The U.S. stock market is soaring to new highs, with the bellwether S&P 500 Index (SPX) up by 16.7% year-to-date through the April 25 close, a robust 24.7% above the low reached in intraday trading on Dec. 26, 2018. The pessimists say that the market has risen too far, too fast, and that a nasty correction, if not a genuine bear market, is due to follow. However, five top investment professionals see opportunities for further gains, and shared their recommendations with Bloomberg.

These experts are: Jim Hamel, portfolio manager, Artisan Global Opportunities Fund; Sarah Ketterer, CEO and fund manager, Causeway Capital Management; Ian Harnett, chief investment strategist, Absolute Strategy Research; Joe Davis, global chief economist and head of investment strategy, The Vanguard Group; and Jim Paulsen, chief investment strategist, The Leuthold Group. The table below summarizes their suggestions for investors.

5 Strategies For The Market's Peak

  • Hamel: invest in "new profit cycles" spawned by ESG criteria
  • Ketterer: shift toward value stocks
  • Harnett: pursue a mix of "strategic caution and tactical agility"
  • Davis: don't chase short-term gains; diversify in line with your risk tolerance
  • Paulsen: expect market turbulence, but stay invested in stocks

Source: Bloomberg

Significance For Investors

Here we explore these investment professionals' comments in more detail.

Jim Hamel. He is convinced that so-called environment, social and governance (ESG) criteria are generating promising new avenues for profit. For one example, he cites the energy sector, which he believes is "at an inflection point," as companies that adopt ESG principles "increasingly view utilizing less carbon-intensive energy alternatives as an economic decision."

Hamel notes that the prices of wind- and solar-driven power are falling, making them "viable options likely to see accelerating adoption in the years ahead." To play this trend, Bloomberg suggests the iShares Global Clean Energy ETF (ICLN), which is up 22.2% YTD through April 25.

Sarah Ketterer. She notes that value stocks have underperformed growth stocks through much of the current bull market, "resulting in historically wide gaps between value indexes and growth indexes." Based on data since 2000, she finds that cheap stocks in the MSCI All Country World Index (ACWI) outperform expensive stocks by more than 40% over the next 12 months when the gap between their respective earning yields is within the top decile.

Right now, Ketterer says that the earnings yield gap is in the 92nd percentile. "At some point, extreme levels of depressed valuations will inspire buyers to snap up bargains," she asserts. Meanwhile, Morgan Stanley sees key vulnerabilities for growth stocks that are spurring a rotation away from them. Bloomberg suggests the Pacer Developed Markets International Cash Cows 100 ETF (ICOW) as a way to play the value theme. The fund has a global portfolio of 100 companies with high free cash flow yields.

Ian Harnett. If commodity prices rally because of low real yields, basic resources such as oil and gas may be among the cyclical sectors poised to rally in the second quarter of 2019, in his opinion. Unlike Ketterer, Harnett is overweight in growth versus value, but prefers quality to momentum. In line with Harnett's views, Bloomberg suggests the Schwab U.S. Large-Cap Growth ETF (SCHG), which is overweight in information technology, communication services, and consumer discretionary, with underweight positions in financials and consumer staples.

Joe Davis. "While it’s tempting to react to day-to-day market swings in the hopes of adding return, it may backfire. Investors who abandon best practices in search of short-term returns end up eroding as much as 3 percent of their portfolio’s value, according to Vanguard research," Davis says.

"A portfolio with a high level of diversification that aligns with their risk tolerance...may not produce immediate outsize returns, but it may better protect against an economic downturn or significant market swings," he adds. For a low-cost diversified fund that invests in U.S. and global stocks, Bloomberg suggests the Vanguard Total Stock Market ETF (VTI).

Jim Paulsen. In a recent note to Leuthold clients, Paulsen says that his "Worry Gauge" points to more stock market gains ahead. In remarks to Bloomberg, he recommends "cheaper international stocks (in both developed and emerging markets), as well as beneficiaries of a weaker U.S. dollar (energy, materials and industrials), and leaders of an economic revival (financials). Remain underweight on consumer sectors that may be squeezed by rising labor costs, and avoid the popular FAANG stocks."

Looking Ahead

Since the future paths of the world economy and global stock markets are unknowable, the advice from Joe Davis is especially sound. Indeed, it always makes sense to follow a disciplined, long-term approach to investing built upon understanding your tolerance for risk and diversifying your holdings accordingly.