While the stock market appears to want to move higher, we may be seeing a shift from high momentum growth stocks like Google Inc. (NASDAQ/GOOG) and priceline.com Incorporated (NASDAQ/PCLN)—which are both trading above $1,000 a share—to the more “boring” names.
The gains made by the momentum stocks have been spectacular so far, to the point where we are seeing overextension on the charts, which are warning of a possible correction.
Cyclical stocks, or those companies that swing with the U.S. economy, appear to be backing off. These include goods and services that are non-essential to the consumer. Spending on these discretionary goods and services tends to fall when the U.S. economy stalls and surges when consumers are spending during the good times, when jobs are plentiful.
Should the U.S. economy falter, you should look at reducing your stock market exposure to cyclical stocks, such as those in the automotive, furniture, retail, travel, and restaurant sectors. When times aren’t so good, consumers will look to cut spending in these areas first to save money.
While the cyclical stocks are continuing to fare pretty well, as shown by the chart of the Morgan Stanley Cyclicals Index below, I believe the stocks will be laggards if the U.S. economy continues to stall.
Chart courtesy of www.StockCharts.com
What you should look at is the defensive sector. I know these may seem like boring stocks, but should the U.S. economy stall, I would look at these companies to outperform the broader stock market.
Defensive stocks are those companies that deliver steady earnings and dividends regardless of how the U.S. economy is doing. In bad times … Read More
As I’ve been stating for most of the past year, interest rates will rise, and this will have a significant impact on the markets. But the real question you have to ask yourself is why are interest rates rising?
If these rates were rising due to a much stronger economy, this would actually be bullish, as corporate earnings would also be increasing. But interest rates, I believe, are increasing as the market is now adjusting to a more “normal” environment and pricing in the exit of the Federal Reserve.
This will have an impact on corporate earnings, as firms have benefited from the extremely low interest levels. According to Bloomberg, the costs of borrowing for S&P 500 companies was only 1.4% of sales over the past year, a record-low during the 11 years that these data have been kept. (Source: Bloomberg, September 2, 2013.)
Not only is the expense of higher interest rates going to reduce corporate earnings, but many companies have borrowed to fund share buybacks and dividends. This will also begin to decrease as interest rates rise.
Since revenue is not accelerating and costs associated with higher interest rates are beginning to rise, this squeeze can only mean a lower level of corporate earnings growth.
This is not something to be taken lightly. Historically, a huge part of total returns results directly from cash being returned to shareholders in the form of dividends and buybacks. With increasing costs from higher interest rates, shareholders will get less money back, and the higher costs will result in lower levels of corporate earnings.
This is a significant paradigm shift that we … Read More
Bank stocks have been one of the strongest sectors in the market over the past year. Bank stocks have rallied sharply after many investors dumped shares on fears that the financial crisis might worsen. Those fears obviously never materialized, and many bank stocks have begun to resume paying dividends and generating profits.
There are two questions I am often asked: 1) is it too late to incorporate bank stocks into one’s investment strategy; and 2) if someone has already owned bank stocks over the past couple of years, is this the time for that investor to start taking profits?
Since the fall of 2011, an index of bank stocks has almost doubled in value. Clearly, an investment strategy that owns a number of bank stocks has seen significant gains in this sector. But no one can rationally expect this type of return to continue forever.
Part of my cautious view on bank stocks, in terms of reducing the sector weighting in an investment strategy, is the fact that there is a limit to upside capital appreciation in every sector. A big question when developing an investment strategy: what is the future outlook for the sector?
Obviously, the low-hanging fruit has already been picked when it comes to bank stocks. Regardless of what was thought about bank stocks in the past, as an investor you are only interested in the potential for growth in earnings and revenues. Large gains have already been realized; now we need to consider how bank stocks fit into an investment strategy over the next decade.
Large concerns for bank stocks shareholders are increased regulation and a … Read More
Economist Nouriel Roubini, also known as Dr. Doom, is finally on board with the stock market upswing; in fact, he believes the stock market can go even higher over the next two years.
Now, if you are familiar with the often bearish opinions of Roubini, you’ll know that his hawkish view of the stock market is somewhat bizarre, but you’ll also understand why he thinks this way.
The thinking behind Roubini’s view is similar to my own view on the stock market. Roubini believes that the concerted move by the world’s central banks to provide easy access to money via aggressive monetary policy is helping to drive the current buying in the stock market.
“In the short-term, it’s great for assets,” said Roubini about investors riding the bubble higher. (Source: Farrell, M., “Dr. Doom: Buy stocks while you still can,” CNNMoney.com, April 30, 2013.)
As many of you know, I have long been a critic of the Federal Reserve’s money-printing operations, along with the easy money flow from the world’s other banks.
Roubini predicts that the stock market will move higher over the next two years—as long as the Federal Reserve continues its aggressive stimulus strategy.
Of course, Roubini is aptly named Dr. Doom for a reason: he believes a period of reckoning is coming. And I’m on the same page.
As interest rates edge higher, investors will exit the stock market, and there will be a subsequent backlash.
I refer to this cause and effect as the impending economic Armageddon—it’s coming.
Interest rates will inevitably move higher. The low or near-zero interest rates are currently enticing investors to look … Read More
The Dow Jones Industrial Average rallied for 10 straight days and, in the process, established several record highs. And while the Wall Street bulls are glorifying the upward move, I continue to believe a correction is on the way—I just can’t tell you when or by how much. The thing I would warn you against is chasing dividends on Dow stocks. The average dividend yield on the 30 Dow stocks currently sits around 2.82%.
The top-five dividend yields belong to AT&T Inc. (NYSE/T), Intel Corporation (NASDAQ/INTC), Verizon Communications Inc. (NYSE/VZ), Merck & Co., Inc (NYSE/MRK), and Microsoft Corporation (NASDAQ/MSFT). The problem with chasing the dividends on these stocks is that I feel there is limited upside in the share price appreciation potential at this point.
A contrarian trade you can play is employing the “Dogs of the Dow” investment strategy, which is simple and has beaten the Dow on average since 1972. The five companies included in this group are the lowest-priced stocks.
The theory is that these Dow companies are facing some issues, but with a turnaround, they can generate some above-average returns and, as such, are viewed as contrarian stocks.
Let’s take a look at the strategy.
At the close of March 15, the five dogs of the Dow were:
1. Alcoa Inc. (NYSE/AA; $8.58)
2. Bank of America Corporation (NYSE/BAC; $12.38)
3. Intel ($21.20)
4. Cisco Systems, Inc. (NASDAQ/CSCO; $21.68)
5. Hewlett-Packard Company (NYSE/HPQ; $22.42)
Now take a look at the results, assuming you bought these five dog stocks based on the close on December 31, 2012 with the advance to March 18.
The table shows four … Read More