The Market Confounds Bulls and Bears: Where Do We Go From Here?
Thursday, May 10, 2012 • 10:31am
Stocks roared up 12% in 2012’s first quarter, catching the bears flat footed. This performance was all the more remarkable in that it came after an 11.2% gain in the prior quarter. Moreover, it capped a tremendous three year run, with the market up 108% from March 9, 2009.
Financials led the brigade. Valuations started the year at very low levels, in many cases below book value; sentiment was negative amid a still-struggling housing market and a host of lawsuits stemming from the subprime debt crisis.
A full 15% of the market’s strength was attributable to a single stock, Apple, which soared 48% in Q1. Overseas stocks not only joined the party but in some cases exceeded it. Japanese stocks soared 19%, and even European stocks chocked up double digit percentage gains.
Losers in Q1 were long dated Treasuries. Investors got a taste of what rising interest rates can do to seemingly risk free bonds!
Stock Markets Remain Attractive
We believe stock investors will continue to be rewarded, although we also believe the market is susceptible to a correction, as it has recently shown. We do not expect a continuation of double digit percentage rises on a quarterly basis!
Valuations remain attractive, although stock prices are up 30% since early October. With the recovery from the 2008 financial crisis, corporate earnings have staged a remarkable rebound. Now growth will be harder to come by, as comparisons with year ago tallies become more challenging.
On the economic front, policy makers remain concerned that the recovery is fragile. Consumer spending has strengthened since September, as confidence has improved. Joblessness has declined, and weekly initial unemployment claims have retreated to levels last seen four years ago.
Housing, consumers’ biggest asset, remains in a funk. However, analysts detect a leveling off in the pace of declines, and believe that record low mortgage rates, rapid rent increases, coupled with green shoots in the new home market, indicate improvement is at hand.
Policy makers worldwide remain committed to keeping interest rates low.
The European sovereign debt crisis is the key “known unknown.” The challenges of implementing austerity measures are severe.
China intends to slow its economy to stamp out rampant property speculation. The hope is to avoid overly impacting other aspects of the economy.
Stateside, absent Congressional action, taxes will jump next year. Presidential elections will be held in November. Uncertainty prevails as to the outcome, and that’s not helpful. Industries such as defense, healthcare, and utilities could be affected.
Dividend Paying Stocks
As investors strive for yield in this low interest rate environment, dividend paying stocks should prove profitable. Dividends are a tangible sign of not only profitability but of willingness to share the free cash flow with investors. No company is automatically a buy simply because it pays a dividend; a careful examination of underlying profitability is required.
Large Cap Tech
In the rush to invest in companies involving the “cloud,” “social media,” and “mobility” some legacy techs have been ignored. Don’t overlook their strong balance sheets, cash flow generation, key divisions participating in the hot areas, dividends or dividend paying potential.
Euro Based But Globally Focused
Investors have sold off all companies based in Europe without analyzing if much of their business is outside of Europe. Just as many U.S. based companies make most of their profits overseas, so do many European based companies. They are poised to outperform.
Where Not to Invest
Long dated Treasuries got walloped in Q1. If rates move higher as the economy improves and central banks sell bonds to reduce their balance sheets, investors could take surprising losses.
Social media stocks like Facebook may prove treacherous: Valuations are preposterous, continued breakneck growth is unlikely, the trials/tribulations of being public will weigh, the history of internet stocks is not pretty, and the performance of last year’s social media IPO class ho-hum.
Note: David G. Dietze, JD, CFA, CFP™ is President and Chief Investment Strategist of Point View Wealth Management, Inc., a registered investment advisor at 382 Springfield Avenue, Summit. The full-length version of this article is available at: www.ptview.com.
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