April was an incredible month for the market.
The S&P 500 gained nearly 18% for the month. The Dow added 16%. And the Nasdaq rose 22%.
But the market may have gotten ahead of itself.
“I understand the market has been up a lot since the March low,” said Bianco Research’s James Bianco. “But what I see in the market is a retracement rally that looks very similar to the first type of rallies that you get in protracted bear markets.
“We’ll revisit the 2,200 S&P low, if not make a lower low – probably by late summer,” Bianco added. “That’s going to come because we’re going to find out now is a critical time for the market.”
Goldman Sachs chief equity strategist David Kostin echoed that sentiment in a report this week, noting that recovering from the coronavirus crisis could be a bumpy ride.
“The path to recovery is extremely uncertain and likely to be uneven,” Kostin wrote. “For equity investors, this means that many ‘winners’ and ‘losers’ will likely be determined by the ability of businesses to reopen and by the speed of consumer demand normalization instead of traditional cyclicality.”
The Goldman strategist and his team say investors should adopt a “barbell strategy” that doesn’t rely on trying to identify whether the market has risen too far, too fast. And according to Kostin, holding a balanced portfolio of stocks with the right set of attributes can put investors in a position to see gains regardless of whether the market continues on its trend from this past month.
“In the near term, we recommend investors adopt a barbell strategy of owning cyclical stocks that will benefit from the initial reopening of the economy and defensive stocks that are most insulated from liquidity and default risks,” Kostin wrote.
Kostin and his team suggest looking for stocks that fall under two categories, Quality At A Reasonable Price, and Goods Producing Cyclicals, while avoiding stocks that have significant exposure to small businesses, which are likely to be the hardest hit by the lockdowns amid the coronavirus pandemic.
In the Quality At A Reasonable Price basket, the Goldman team identified stocks with an “Altman Z-Score” that is more than double the median for the S&P 500, explaining that the score “combines five metrics to assess the likelihood of default: working capital/assets, retained earnings/assets, EBIT/assets, market capitalization/liabilities, and sales/assets.”
These quality stock are the ones to own if the economic recovery is slower than is currently expected, or if progress on a vaccine or treatment for the coronavirus moves slower than hoped for, Kostin argues.
As for Goods Producing Cyclicals, Kostin says these stocks are the ones to hold to selectively participate in the reopening of the economy by focusing on the industries that are likely to be the earliest to recover from the shutdowns.
This basket includes chip stocks Nvidia (NASDAQ: NVDA) and Intel (NASDAQ: INTC), defense contractors Lockheed Martin (NYSE: LMT) and Raytheon Technologies (NYSE: RTX), and home electronics giant Garmin (NASDAQ: GRMN).
“The reopening experience in China shows that manufacturing and construction activity will likely recover faster than consumer services,” Kostin wrote in the note. “As a result, we expect goods-producing cyclical stocks will be the primary beneficiaries of the initial restart. In particular, we prefer companies that sell to other businesses (B2B) versus those that sell directly to consumers (B2C) and rely on face-to-face interactions with consumers, which will be limited while virus control measures remain in place.”