A stock market strategist who I trust and respect is advocating that investors take some money off the table and book profits from U.S. equities.

His view is that, with declining earnings expectations for the bottom half of the year combined with mostly zero top-line growth, the likelihood of reduced monetary stimulus and lackluster global growth do not warrant a rising stock market. The market’s expectation for an improving U.S. economy is already priced into share prices.

But while this market strategist makes a very good case for taking profits in U.S. blue chips, there still isn’t anywhere else for most investors to go other than the stock market. This gentleman thinks that a rising cash position is warranted and that the cash can then be put to work in the next correction and/or recession.

Cash in the bank is always a good thing, but there is an “opportunity cost” to not being in the stock market’s best positions.

From my own perspective, I find it difficult taking profits in blue chips like Johnson & Johnson (JNJ, quote) with a current price-to-earnings ratio of around 20 and a 2.9% dividend yield. With an earnings plus dividend growth rate of approximately 10% over the next 12 months, JNJ to me is a big “Hold.”

And there are many other blue chips that I wouldn’t sell either, even though they have done extremely well on the stock market recently.

Realistically, I come back to the old adage that it usually doesn’t pay to fight the Fed. With a change in monetary policy somewhat likely this September, the Fed’s actions will be the catalyst for correction, even though the stock market’s been due for a correction for months now.

The perception of certainty is a Wall Street staple, and that’s what the central bank has provided to date. Monetary policy, at least in the near-term trading action, always overrides the marketplace’s real financial metrics. Second-quarter earnings and revenue growth among blue chips was mediocre, at best.

There has been, however, a continued resiliency in the stock market this entire year, and the market’s strength, even in the face of weak news, is difficult to trade against.

I’m certainly an advocate for creating lists of good companies that would be worth accumulating when they are down. Given the current information, however, I wouldn’t be selling the market’s best-performing blue chips in anticipation of the future.

With investor sentiment interwoven with the next Fed meeting in a little over a month, I expect stocks to basically move sideways, save for a shock. The argument for lightening up on U.S. equities makes total sense with declining earnings expectations, yet the one thing that the market strategist I mentioned above is not quantifying is investor sentiment itself.

This is still a market that wants to bid stocks, regardless of a mediocre outlook. There is also some asset rotation taking place, as some investors move out of bonds. The resiliency continues.

Author - Mitchell Clark, B.Comm

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