Market Outlook

We’ve just entered earnings season and investors are reading between the lines in releases from Alcoa and CSX (a large railroad). Alcoa said their customers in China, Europe and elsewhere (here as well) are doing better across all lines and they increased their anticipated growth rate. CSX reported a rise in freight tons, a key indicator of future economic growth. Expect upbeat second-quarter reports from others and more optimism about the near-term future than we have heard for some time. Exports to emerging markets are booming. Capital spending is on the rise. A double-dip recession is really a long shot. Not going to happen.

What is missing is a spurt of new hiring at large companies. Many are understandably cautious about the future primarily due to uncertainty about health-care costs, taxes and regulations.

Despite the drumbeat of gloom and doom in the financial and general media, investors have little choice but to buy stocks as long as interest rates remain low. And they will remain low for the foreseeable future. They have also loaded up on bond funds, preferred stocks and other income vehicles. Longer-term bond funds are not a good bet. Investors have put many hundreds of billions of dollars into long-term bond funds to find income. When rates are so low, the market risk is high. Preferred stocks are attractive, however, and our Reduced Risk income portfolio is taking advantage. This is our best portfolio option in this difficult equity market environment. Receiving 7 percent in dividends is fun in a sideways market!

All that said, let's not get too carried away. There are no catalysts for GDP growth much beyond three or briefly four percent. The headwinds of rising taxes and ten percent unemployment are too strong. Still, the tailwinds of rising exports and surging earnings this year amid a low-rate environment will carry the day to higher prices. I find it very difficult to make a bearish case when prices are historically low and earnings are rising. As I've said many times, stocks are a bet on future earnings. Earnings trump all. The outlook is very good for this year, and fairly so for 2011. What stocks have going for them above all else is valuation. Relative to historical measures and today's returns in alternative investments, stocks are cheap.