So much for September historically being the market's worst month. Stocks are doing very well, rising in all but one session in September. The S&P 500 is at its highest level in a month.
Why the renewed interest in stocks after the August sell-off? The economic news, while still grim, is not quite as weak as investors anticipated, so being "less bad" is seen as a positive for the economy and in turn corporate profits. Couple that with the $3 trillion on the sidelines receiving next to no yield, and you can see why the market has rallied.
I should caution that when the S&P 500 has reached the upper end of its range (1130) the market has looked strong and at the bottom (1040) it has looked terrible. The market is testing the upper end of the range today. Traders who sold when stocks looked good at the top and bought when the market was weak at the bottom were right to do so. But someday they will be wrong. We think that day will be in October but it happen as early as tomorrow.
The odds favor a break through the upper end. Here's why: The negatives are well known: Debt, deficits, slow growth, unemployment, etc. That's old news and already in the market. Potential positives are not in the market. The $3 trillion on the sidelines can fuel a rally and the $1.7 trillion in cash on corporate books (other than financial institutions) will at some point be put to work. When investors expect the worst then the surprises are positive. In time the positive events that will drive the market higher will become known. We expect emerging market country ETFs and higher yielding U.S. equities will perform best.
Monday, September 13, 2010
Tuesday, August 10, 2010
Deflation
From time to time we're hearing voices mentioning or even forecasting deflation. While few are predicting deflation now, most admit that the possibility is there and in fact rising. To hedge against that possibility investors are nailing down income-producing vehicles now, figuring that yields will be even lower in the future. We are seeing that with many preferred stocks. Most are at levels they haven't seen in a long time, or in some cases ever. While utility stocks have risen for the same reason and rose on Friday after the initial knee-jerk selling, they should be doing even better. Soon they will.
Although yields have fallen, this continues to be a better time to invest for dividends than it is to invest for capital gains. In a slow-growing economy, stock prices and corporate profits will do only a little better than track nominal GDP growth, so dividends and income will count for a good deal of total return.
I do not share a deep concern about deflation. Unlike our experience in the 1930s and Japan's since the late '80s, the Fed and Treasury have both the tools to combat deflation and the willingness to use them. There are few winners when deflation takes hold, but many losers. Stocks decline and businesses and individuals postpone purchases because prices will be lower later. Deflation feeds on itself. It is in the interests of most to see that it doesn't occur. The Fed is well aware of that. The Fed would prefer modest inflation and it has the tools to bring it about.
After Tuesday's Fed meeting it is clear rates will stay low well into next year. Income investors frustrated with returns and tired of chasing bonds higher and higher will increasingly turn to high yielding stocks, utilities especially. Our Reduced Risk portfolio holds these as well as high quality trust preferreds. It is well positioned for this market environment.
David Vomund
Although yields have fallen, this continues to be a better time to invest for dividends than it is to invest for capital gains. In a slow-growing economy, stock prices and corporate profits will do only a little better than track nominal GDP growth, so dividends and income will count for a good deal of total return.
I do not share a deep concern about deflation. Unlike our experience in the 1930s and Japan's since the late '80s, the Fed and Treasury have both the tools to combat deflation and the willingness to use them. There are few winners when deflation takes hold, but many losers. Stocks decline and businesses and individuals postpone purchases because prices will be lower later. Deflation feeds on itself. It is in the interests of most to see that it doesn't occur. The Fed is well aware of that. The Fed would prefer modest inflation and it has the tools to bring it about.
After Tuesday's Fed meeting it is clear rates will stay low well into next year. Income investors frustrated with returns and tired of chasing bonds higher and higher will increasingly turn to high yielding stocks, utilities especially. Our Reduced Risk portfolio holds these as well as high quality trust preferreds. It is well positioned for this market environment.
David Vomund
Wednesday, July 14, 2010
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.
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.
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