Tim Knepp: 'We want to be exposed to defensive consumer sectors'

Investors should take a cautious approach to the equity markets at this point in the stock market rally, according to Tim Knepp, chief investment officer of Genworth Financial Asset Management. “Investors need to be careful about taking these gains for granted,” Mr. Knepp said of the rally, which has pushed up the S&P 500 more than 60% since March. “The markets are continuing down a path of a liquidity-induced rally that is just policy liquidity, as opposed to real liquidity on the ground,” he said. “And that liquidity being provided by central banks is leading to inflation in financial assets.” Mr. Knepp, whose firm has $7 billion in assets under management, is not suggesting a knee-jerk move away from equities, just a closer look at the “pricing power” of individual stocks. “We want to be exposed to the more defensive consumer sectors,” he said. This includes health care, consumer staples and telecommunications.
Mr. Knepp's general concern with the stock market at its current levels is that much of the enthusiasm has been based on corporate-earnings reports that are not showing a lot of top-line revenue growth. “People get all excited that companies have beaten Wall Street estimates,” he said. “But people also need to understand that corporate cost cutting has been aggressive, and they are beating estimates that have been aggressively lowered by the Street.” According to Mr. Knepp, in the most recent earnings cycle, 75% of companies reported earnings that were better than the consensus Wall Street estimate.