My First Move In 2021? Protect Profits…
As I write this, it looks like control of the Senate has been decided. The key Senate runoff elections were too close to call at first, but now it’s looking like Democrats will take control of the Senate.
Regardless of how these races shake out, Congress will remain deeply divided with the slimmest of majorities. And since Washington controls everything from foreign trade policy with China to the capital gains taxes on your e*Trade account, investors are understandably anxious.
As I’ve said before, Wall Street likes checks and balances. Should Democrats take charge of both chambers of Congress, at least one analyst from Oppenheimer sees a 10% selloff in the S&P 500. Others believe those fears may be overblown. In fact, stocks are seeing a nice bump this morning.
In the case of a 50/50 split, it will be tough to pass sweeping legislation. Gridlock will likely remain. Still, if nothing else, the pro-business tone of the last four years will likely melt away. And the prospect of steep corporate tax hikes and stricter regulatory reforms could certainly take a bite out of equity prices.
But here’s what I’m really focused on…
With the major averages at record highs (and the vaccine and stimulus cards already having been played), I don’t see many positive catalysts in the near-term.
Could the Dow keep chugging along from 30,000 to 35,000? Sure. But I see a retreat to 25,000 as far more likely.
Regardless of the election, this is a time for caution. According to Morningstar, the average U.S. stock is trading at a 6% premium to its fair value. Outside of the energy sector, valuations are a bit stretched. With few exceptions, the attractive discounts we saw this past spring and summer are mostly gone.
So the question is, what do we do now?
Well, for starters, this doesn’t mean I will liquidate all my holdings over at High-Yield Investing. We are not a trading newsletter that tries to “time the market”. We invest in quality businesses built to generate positive cash flow and churn out dependable dividends in any environment.
But I’m not sitting on my hands, either. In fact, I just told my readers that I will cash out profits on some positions while protecting others with stop losses. In this environment, I think it’s a good way to start the year off on the right foot.
[On a similar note, I recently wrote about one of the most common questions I get asked, “Where do I start?” You can check that out here.]
Action To Take
No matter what, there will always be sectors that benefit from change.
While I’m no gold bug, I think precious metals will continue to shine in the year ahead as government spending accelerates and inflation expectations heat up. A widening yield curve could also bode well for the banking clan.
So don’t be afraid to go on offense, especially when the time is right. But for now, think about protecting your capital and playing some defense.
In the meantime, if you’re looking for high yields in this low-rate environment, then I invite you to learn more about my premium newsletter service. We’re collecting the kinds of yields most investors dream about… 6%… 8%… even 12%. Go here to learn more now.