What to do if you're not Warren Buffett and buying more stocks doesn't look so great

  • There are many signs investors don't want to buy more stocks.
  • Neutral sentiment on the market has been well above its historical average for 11 consecutive weeks.
  • Bond ETFs made up the majority of the top 10 in flows for April.
A trader pauses while working on the floor of the New York Stock Exchange.
Getty Images
A trader pauses while working on the floor of the New York Stock Exchange.

I haven't done much stock buying recently, and when I do, I hold my nose and cringe a little. And I'm an investment adviser. I think all the market buyers who keep talking about the great values they're picking up will eventually have to average down. Portfolio rebalancing and some bargain hunting — a nice way of saying I'm "averaging down" — is about it for me at this very moment.

I'm not alone.

Maybe Warren Buffett saying on Friday he bought 75 million more shares of Apple is enough for you. It isn't for me, and if it also seems to you like investors are stuck in neutral, it's because they literally are. They've been that way since mid-February, according to the Association of Individual Investors. Neutral sentiment — expectations that stock prices will stay essentially unchanged over the next six months — rose 3.8 percentage points to 41.4 percent in the most recent week. That marks the eleventh-consecutive week the neutral view has gone up, and it's well above the historical average of just 31 percent.

A recent survey of investors who trade $1 million-plus brokerage accounts found a high level of individuals who expect no gain from the stock market this quarter. Sell in May and go away — a dubious investment strategy — seems to have arrived early this year.

The outflow of money from stock ETFs reinforces the story. The major averages, barely unchanged for 2018 so far, have been in a downtrend and bond ETFs, even as yields rise and every trader says sell, have been the hottest ETF investments. Six of the top 10 ETFs in new flows from investors in April were bond funds.

Bond ETFs take over top 10 for new money

April flows
iShares Short Treasury Bond $2.53B
iShares Core S&P 500 $1.84B
iShares Core MSCI Emerging Markets $1.84B
iShares Core MSCI EAFE $1.81B
iShares 20+ Year Treasury Bond $1.7B
iShares Core US Aggregate Bond $1.63B
iShares Floating Rate Bond $1.22B
SPDR Gold Trust $1.1B
iShares iBoxx $ Investment Grade Corporate Bond $960M
iShares 1-3 Year Treasury Bond $942M
FactSet Research Systems, April 2018 ETF flows report

The plague of neutrality is creeping into everything — Friday's closely watched nonfarm payroll report was more or less neutral, not too hot or cold.

The litany of reasons for the downtrend are numerous — geopolitical, political, inflation, and interest rates. But the fact of the matter is that uptrends and downtrends often persist without any particular reason. Even in the face of incredibly strong corporate earnings, stocks just can't seem to hold onto any bounce.

"My experience tells me that markets don't run on autopilot for long. You need to remain engaged with your portfolio."

The VIX, Wall Street's fear gauge, isn't particularly helpful now either. It's currently at 16, above the recent trend of about 10, but well below the 50 it hit in February. The VIX's long-term average is about 20. With all of the uncertainty, I could only surmise that corporate buybacks are countering ETF outflows, which have risen mightily since the passage of the Tax Cuts and Jobs Act of 2017. This has kept the VIX at a very moderate level. Meaning, it is simply reflecting the same stuck in neutral stance that investors are in.

What investors can do when there's nothing to buy 

Just because you can't find a reason to buy any stocks doesn't mean you don't need a game plan. My experience tells me that markets don't run on autopilot for long. You need to remain engaged with your portfolio. After last year's stock market run, if I told you the S&P 500 is down less than 2 percent year-to-date, you probably wouldn't think that was so bad, right? The worst thing to happen to investors this year, from a stock market perspective, was the rally in January. Now all stocks are measured against a brief moment of euphoria.

Here is what I recommend investors should do to get out of the thinking that they're stuck in neutral — take a broader look at your portfolio and its purpose:

  1. Millennials: Keep investing, whether by 401(k), ROTH, or traditional IRA; just keep buying and hope that stocks get pummeled. A down market is your friend. Many boomers have accumulated stock market wealth because they bought stocks during down markets.
  2. Gen-X: The oldest among this generation are now in early 50s. But based on the average lifespan getting longer and the super high cost of health care now and in the future, their working years are going to be longer than their parents. So, keep investing and realize that in 20 years, we will have gone through several bull/bear market cycles. Fixed income should account for a portion of your assets, generally 20 percent to 30 percent at most, in my opinion, but you still have a long way to go. A down market is your friend too.
  3. Boomers: As you'd expect, this cohort faces a longer lifespan than their parents as well, and many will work longer and live through longer retirements. But portfolio balance is critically important for this generation because you don't want to be forced to sell investments that are down a lot to generate cash for living expenses. A strategy for this generation could be to divide your investments into different risk categories of conservative, moderate, and growth. This way you'll have the conservative portfolio to draw funds from while allowing yourself the time necessary to let your growth portion grow.

There are some stock dogs worth keeping on radar 

It has never been more important to own secular growth companies that are not dependent on external conditions. With little room for disappointing investors, companies that have potential to grow in any environment, secular growers, are getting harder to find but should play a more important role in one's portfolio than in recent history. In my never-ending search for contrarian, down-trodden, and unloved stocks, I am attracted to a few underperforming sectors this year, mainly consumer staples, which is down double digits this year based on the performance of the Consumer Staples Select Sector SPDR ETF (XLP).

One thing common in a downtrend is that even companies that report strong earnings still go down, or at the very least, don't go up. But when the trend reverses, these are the companies that rally and lead the new bull market. They're typically the ones that hold up best in a bear market.

Right now these stocks have been hit by the rising bond yields. They're dividend payers and investors have sold them as bond yields have gone up. But interest-rate sensitivity as a sell on secular growth companies will reach its limit — I'm more confident saying this about consumer stocks than utilities. These are steady growers that have come down to much more reasonable valuations and have severely lagged technology stocks. The quality names in the group historically do not get cheap; just varying degrees of expensiveness. But that's the price investors have always been willing to pay for steady Eddie fundamentals.

Just because investors, and maybe you are among them, are stuck in neutral, there is still plenty to do to make sure your portfolio is aligned with your goals and risk tolerance.

By Mitch Goldberg, president of investment advisor ClientFirst Strategy

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