On Tuesday the S&P 500 (^GSPC) traded above 3,000 for the first time since early March, and the Dow (^DJIA) hovered above 25,000 for much of the session, but one strategist warns a pause and digestion in the markets is likely.
“While I do think we’re going to 30,000 [on the Dow] next year, and 40,000 by 2023, I don’t think this is the beginning of the run to new highs, right here,” Paul Schatz, president of Heritage Capital told Yahoo Finance’s On the Move.
“I think we need some pause and digestion first,” he added.
Schatz notes that since the middle of April, with the exception of the Nasdaq (^IXIC), the markets have been in a trading range, bouncing around from the lower to upper end of the band.
“The S&P 500 has had a slight upward bias, but really the Dow, the mids, the smalls, have almost been this perfectly flat range across the top,” said Schatz. “Is it justified? Sure. I mean I think this will be the only lockdown of the entire economy we see the rest of our lives.”
“I do not believe we will ever have a nationwide lockdown again, given what we learned,” he added.
“Whatever decline we're going to get, we're getting between now and the end of Q2 and then things will even get back to more normalcy as we go through the summer,” said Schatz.
“This is a kitchen sink quarter,” he added.
Most of Tuesday’s market action was fueled by hopes of a recovery and developments surrounding a possible COVID-19 vaccine. The New York Stock Exchange partially re-opened its trading floor amid strict social distancing guidelines.
The ‘haves’ and ‘have nots’
Schatz recommends dividing investments into the “haves” - like technology stocks, and the “have nots.”
“The ‘have nots’ are the ones that have the most risk. Things like airlines and hotels and cruise ships,” said Schatz. “I'm not going to buy the cruise lines.”
He goes on to say banks are part of the ‘have nots’ investments since they are lenders to companies under pressure from the pandemic and may need to build more reserves.
If investors have to be in ‘have nots,’ Schatz recommends to only look at the best company in that category.
“A lot of the ‘have-nots’, I'll only look at best in breed the strongest ‘have not’, like JP Morgan (JPM). In the airline space...the strongest airline is Delta (DAL),” said Schatz.
“Don't go out on a limb and hope to hit 1000% gain in some beaten down stock at two bucks,” he added.
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