There are so many reasons to own some gold and very few not to. Being commodities, they are inherently volatile and so are gold stocks. But that’s the risk you take to own a store of value that is unique in the world.

The spot price of silver has also been particularly positive lately. A silver trade is perhaps even more attractive than gold due to its stronger correction. A lot of Street analysts have been saying to buy silver over gold, because it has more potential upside. As a commodity, silver is used in a lot of manufacturing (especially automobiles) and we know that the industrial economy is outperforming a lot of other industries.

There are always attractive trades in mining companies, but you don’t have to take on company-specific investment risk to have some exposure to gold or silver. There are all kinds of exchange-traded funds (ETFs) that have physical ownership of gold or silver bars and/or futures. For a speculator, I’d consider some mining companies along with a physical position in gold and silver. Today, there are even ETFs that allow you to have a leveraged position in the spot price action. A number of funds, for example, use derivatives to give you twice the percentage change in the spot price of silver or gold. You can even use these funds to bet against the commodities.

In this kind of market, there’s no need for investors to rush into anything. However, I do think that the fundamentals are strong enough for investors to have some kind of hedge in their portfolios, even with the spot price of gold near its all-time high. The prospects in the world for sovereign debt defaults, inflation, war, and currency instability are too great not to warrant some exposure to gold and silver. And it isn’t just these factors that make these commodities attractive. It’s the demand/supply factor as well. Despite the fact that many mining companies are awash in cash (see Precious Metals Winners—Three Excellent Wealth-creating Stocks), global supplies of gold and silver are relatively stagnant.

Probably, the better actionable trade at this time would be to buy silver. Large-cap gold stocks haven’t done much of anything over the over the last 12 months and I don’t believe they need to be an area of focus for equity investors. I’d rather own higher dividend paying stocks in other industries. At the micro-cap level, the trading opportunities are plentiful, but event-driven.

This year is going to be a wacky one for global financial markets. There’s so much political interference that is helping capital markets over the near term. Longer-term, however, the structural problems facing most of the world’s mature economies remain and that’s why you want some exposure to gold and silver. Whether economies get better or they don’t, spot prices should still move higher.

The S&P 500 Index is forming a new base with 1,300 as the floor so far this year. It will likely test this level, but it’s a good sign if it can stay above it. The stock market’s trading volume has been weak, but this isn’t a big surprise considering the amount of investment risk in the global marketplace and an uninspiring outlook.

Short-term, the stock market can tick higher; perhaps for the first half of the year. There is the solid expectation for about 10% earnings growth this year. So, as long as investor sentiment doesn’t change, stock market action should continue to be positive.

There’s recently been a change in investor sentiment regarding precious metals. The spot prices of gold and silver have been improving and their recent price consolidation could be over. Gold stocks have been under quite a bit of pressure since the beginning of December last year. Their current resurgence mimics the action in the spot price.

I’m still not that bullish about the stock market for the next several years. While I prefer higher dividend paying stocks for the income, as a strategy, I’d rather overweight gold. Corporations are very healthy right now and valuations are reasonable. Still, in this new age of austerity, I don’t see where the Main Street growth is going to come from. Investor sentiment should be strong enough for the current bear market rally to complete the right should formation of the main stock market indices. But the fundamental problems in the U.S. and European economies remain—the big problem being sovereign debt. This issue isn’t being addressed, especially in the U.S. due to this year’s Presidential race. This is a big worry for me, because of all its potential influence: zero growth; inflation; government shutdowns; downgrades; defaults, etc. The age of austerity is upon us and I think the sovereign debt crisis will tighten its grip next year. (See The Policies We Have Today Will Hurt Us Tomorrow.)

For now, investor sentiment is experiencing a well-deserved upswing. There’s lots of good news in the U.S. economy, but it’s not trickling down to Main Street. Progress, or growth, is mostly being experienced by the industrial economy, which is now a smaller portion of GDP.

As I’ve been writing, short-term, the stock market is looking okay, with investor sentiment, corporate earnings, and a fair valuation all helping out. This year should pan out, but I’m worried about the next couple of years after the election.

If the stock market doesn’t appreciate much this year, it will clearly be undervalued considering the similar corporate visibility we’re hearing from most large-cap companies. The stock market is already trading at a valuation that’s well under its mean and corporate earnings are robust considering GDP growth.

I think it’s likely that the S&P 500 Index will finish its head-and-shoulders formation, probably later next year. When there is another recession (some say 2013/2014), then this would be the time to consider investing in the stock market as a whole. As I’ve written previously, I wouldn’t buy the market at this point in time, even though corporate earnings are solid. (See Dividend Paying Stocks for Income and the Real Estate Market for Capital Gains.)

The financial health of corporate America continues to improve, but this doesn’t mean that share prices will appreciate. It’s going to take a lot of positive economic news to make the stock market appreciate in a meaningful way, not just good corporate earnings. As we know, the employment and housing sectors just aren’t strong enough yet for this to be a reality.

So far this year, the stock market hasn’t been trading on corporate earnings, but on hope for the future. This is always tenuous. The hope that investors are speculating on is related not to corporate earnings or the economic outlook, but to progress regarding the debt crisis in Greece. With so many political elections around the world this year, you can bet that policy makers will be doing everything they can to minimize any more shocks or crises. The goal, it would seem, is to leave the fallout for next year.

According to Bloomberg, the U.S. stock market will have experienced its strongest January since 1997. Corporate earnings in my view are definitely strong enough to call the current stock market fairly valued. It certainly isn’t expensive. Commodities, particularly precious metals, are getting stronger now and investor sentiment is good enough for more upside in share prices.

Are we in a sucker’s rally? My best guess is probably yes. Share prices should be higher based on the corporate earnings we’re getting, but there is a real reluctance out there. A lot of investors, both institutional and individual, are positioned very conservatively or sitting on the sidelines. The stock market is poised for more gains this year, but nothing is “real” or sustainable unless U.S. employment and housing prices improve. Corporate earnings will continue to be strong.

As I’ve written previously, I would be happy if the S&P 500 Index would hold around the 1,300 level for now. All of last year’s investment risks remain, but it’s pretty obvious that investors have grown tired of thinking about the eurozone debt crisis. A Greek default is almost assured and, while this will pressure the euro currency, the news is already priced into the stock market.

What are holding the equity market at its current level are decent fourth-quarter earnings and reasonable valuations. This is a difficult market in which to make predictions, but there is a growing probability—in my view—that the stock market will perform similarly to last year. A strong start, followed by consolidation and then correction is likely to reflect the change in earnings expectations this year. The economic news is mostly expected to be what it is now—lackluster. So, with the expectation for modest gross domestic product (GDP) growth, it’s difficult to imagine improving corporate visibility. Industry specific economic news should continue to be varied this year, with some sectors significantly outperforming others. The certainty about interest rates is useful, but it’s also a sign that the Federal Reserve expects the economy to continue to be difficult. There’s no bright light at the end of the tunnel yet; it’s continued mediocrity for next while.

With the expectation of choppy economic news and the likelihood of declining earnings expectations over the coming quarters, individual stock selection is absolutely key in a market without a tailwind. (See Austerity, Inflation, Sovereign Debt & Earnings Growth—An Investor’s Survival Guide.) Price strength in gold, silver and oil is a necessary confirmation if the stock market is going to advance further in a meaningful way. My view is that the stock market will be holding up well if the S&P 500 index can build a base around 1,300. As I said, the economic news isn’t yet strong enough for share prices to make a big advancement. Good corporate earnings were the catalyst for a strong January, but the stock market’s next catalyst is elusive.

Very shortly, the market will be in the “lull” between earnings seasons and this makes share prices that much more vulnerable. With only economic news and geopolitical events to go on, investors will be skittish. Accordingly, the trades in the stock market will be event-driven or corporate-specific only. A general investment strategy in this kind of market isn’t likely to work too well. Outperformance is all about owning the right stories at the right time. Fortunately, the economic news right now isn’t bad enough to cause a major decline in sentiment. If we can hold around the current level, the stock market will be doing well.

The stock market has some decent price momentum now, and news from the Federal Reserve that it plans to keep interest rates at their current level going in 2014 is the kind of certainty that investors like. The stock market has accommodative monetary policy, good corporate earnings, and a reasonable valuation to go on. What it needs to take itself to the next level are better economic data. Recent news on durable goods showed a three-percent gain in the month of December, on top of an upwardly revised 4.3% gain in November. Clearly, there is momentum out there. Let’s hope it keeps going.

I am worried that corporate earnings will slow in the bottom half this year. Without growth in employment, U.S. incomes cannot grow and the consumer, Main Street economy will be stuck. A lot of the great earnings we’re getting form large-cap companies are due to their international operations generating the growth. While demand is improving domestically, it’s nowhere near where it was.

Near-term, the stock market is looking good. The S&P 500 Index solidly broke 1,300, and it has performed very well since the beginning of the year, as if a switch on investor sentiment were flipped. Commodities are also confirming the price strength of the stock market, and this is important. Although it’s hard to tell, it’s possible that the correction in gold and silver prices is now over. (See Precious Metals Winners—Three Excellent Wealth-creating Stocks.)

Cautious optimism is my outlook for the stock market right now. With the expectation for 10% growth in corporate earnings, there’s no reason why the stock market can’t accomplish a similar gain for the year or better. If expectations for corporate earnings begin the decline later this year, then all bets are off. The marketplace desperately wants more growth—in the economy and in corporate earnings. Without it, the stock market will sell off just like last year.

The stock market offers up good opportunities no matter whether you’re in a bull market or a bear market, but different kinds of businesses behave differently on the stock market, depending on whether it’s a bull or a bear. The degree to which a stock performs is directly related to the degree institutional investors are willing to be interested in the story. A company growing its earnings by eight percent per year and paying dividends is going to be much less attractive than one growing 20% per year in a bull market. But, in a bear market, investors’ needs change and consistency becomes king.

I want to highlight for you two businesses that I really admire. I admire them because of the wealth they have created for shareholders and the consistency with which they’ve performed on the stock market. Both of them pay a modest amount of dividends and these businesses are what you might call boring and unexciting. In a bullish stock market, I’d bet most investors would ignore these companies. It would be a mistake, however, considering the consistency with which they make money over time. (See The Dow, S&P 500 & the NASDAQ: Why It’s Time to Ignore Them.)

If you have a chance, pull up a long-term chart (20 years) on Ecolab Inc. (NYSE/ECL). This company, based in St. Paul, MN, started out selling carpet cleaning products to hotels. Now the business sells cleaning supplies, and pest control and maintenance services to the foodservice, hospitality and healthcare industries. It isn’t fancy, but it makes money and the stock has been an outstanding, consistent wealth creator for years. It’s up about 20-fold over the last 20 years (not including dividends) and it’s weathered every shock to the system with demonstrable strength. The stock just hit another new record high and I’m surprised that Warren Buffett hasn’t bought it out yet.

The other consistent wealth creator that I admire is W.W. Grainger, Inc.(NYSE/GWW). This company pays a similar amount of dividends to Ecolab (current yield about 1.3%) and has been an outstanding, consistent wealth producer for many years. Based in Lake Forest, IL, W.W. Grainger is a wholesale distributor of industrial equipment such as electric motors and fasteners. It’s not the kind of business that you get excited about, but that doesn’t mean it hasn’t made a ton of money for shareholders. On the stock market, it just hit a new all-time record high, doubling since the beginning of 2010 and quadrupling since 2004 (not including dividends).

Ecolab and W.W. Grainger are but two examples of outstanding businesses that pay dividends and have created an enormous amount of wealth on the stock market. And they’ve performed consistently and with very little downside historically.

An equity portfolio, in my view, needs to have some boring, but consistent wealth creators in order to smooth out the effects of the business cycle on your holdings. You can trade the stock market for capital gains sure, but, at the same time, it can also pay big-time to hold great businesses that pay dividends. In my mind, a consistent business is just as useful as the next high-tech breakthrough.

It’s been a very good start for the stock market since the beginning of the year, but the same thing happened last year. Share prices advanced solidly, then consolidated, followed by a correction. The similarities to last year are quite striking, with the S&P 500 starting this year and last at almost exactly the same level. Figuring out where the market will go this year is very difficult, but corporate earnings are expected to grow about 10%. For the most part, business seems to be holding up, but it certainly isn’t booming.

Commodity prices also have had a good start to the year, with the spot price of gold up about $100.00 an ounce since the end of 2011. In my view, the price of gold seems poised for a new breakout soon, and I base this on technical analysis and the long-term trend. Gold looks poised to trade in a tight range over the very near term. Like oil, there’s been some safe haven buying in gold in recent weeks due to the geopolitical risks with Iran.

So, for the stock market to continue with its advance, we need continued good corporate earnings and better news on the economy. I’m encouraged lately by the financial results being generated in many sectors within the industrial economy, and other industries like retail and pharmaceuticals. The technology sector is holding its own, but corporate earnings growth for many of the brand-name large-caps isn’t strong enough for a bullish stance within the group.

In this kind of stock market, investors wanting to take on new positions should stick with existing winners. I’m usually a buy-low/sell-high kind of investor, but we’re not in a market that recognizes value. I’d buy dividend-paying large-caps that are making new highs in this stock market. You won’t go wrong following those companies that are generating good corporate earnings and paying a dividend. (See How to Get Outperformance in this Kind of Market.)

We’re not in a bull market, so expectations are low and we can’t forget that investment risk for equities remains high. The bank can’t offer you investment returns that beat the rate of inflation and, with the structural problems facing most of the world’s mature economies, preservation of capital, in my view, is more important than trying to generate above-average returns.

Corporate earnings are good right now, but they have to get better for the stock market to advance. Balance sheets are strong and companies are running lean operations. Any uptick in top-line growth (revenues) will translate right into better corporate earnings. With all the current information, the stock market is appropriately valued. Investment risk remains high.

These are excellent corporate earnings from a very mature industry and it’s a strong signal that the industrial economy in the U.S. is in a solid recovery. The stock market’s been pretty keen on Union Pacific for the last six years. Despite a major pullback in its share price during the subprime mortgage crisis (like most other stocks), Union Pacific’s share price appreciated from around $30.00 a share in 2005 to its current all-time record of over $114.00 per share (adjusting for a stock market split).

Corporate earnings have been so strong in the railroad industry; railroad stocks have handedly beat traditional higher growth companies like Intel Corporation (NASDAQ/INTC) and Oracle Corporation (NASDAQ/ORCL). (See Record Results & Good Visibility for Railroad Companies, But Nobody’s Buying the Success.) A lot of brand-name companies like Intel and Oracle haven’t done anything on the stock market for the last 11 years. There’s no need to even consider pure-play technology when companies like McDonald’s Corporation (NYSE/MCD) and Union Pacific are doing so well. As I keep writing, what’s old is new again and the corporate earnings are robust enough in “old names” to support a rising stock market.

I’d own a railroad stock in a long-term equity portfolio, but I’d wait until there was a price retreat before initiating a new position. The biggest issue affecting railroad corporate earnings is fuel costs and this is why Union Pacific’s earnings were so impressive. Last quarter’s fuel costs increased by close to 40%, yet the company was still able to grow its earnings an impressive 24%. And the best sign (for Union Pacific and the economy) is the company’s ability to increase its prices without affecting demand. This means there’s underlying strength within the industry.

The stock market has been kind to railroad stocks over the last five years because of their strong corporate earnings. It’s no wonder Warren Buffett wanted to purchase all of Burlington Northern Santa Fe Railway. It’s a great business to be in once you’ve got your infrastructure built and paid for.

I wouldn’t be surprised if the railroads return more of their corporate earnings to shareholders this year. As a group, they are due for increased dividends. If this happens, then the stock market’s interest in the sector will continue. In this kind of market, it pays to stick with your winners.

For a large-cap stock and Dow Jones component, McDonald’s has appreciated steadily and with remarkable consistency since 1980. Put a ruler underneath the company’s share price and you’ll see how extraordinary its performance has been. This large-cap stock struggled in 2002/2003, but that’s about it. When the stock market collapsed in 2008 and then hit a low in March of 2009, McDonald’s basically traded flat, just below $60.00 a share. This week, it hit an all-time record high of over $101.00 per share, with a current dividend yield of 2.8%. Not bad at all if you ask me. The stock split seven times since the early 80s and is now due for another split.

A stock market performance like McDonald’s makes me think that bothering with the rest of the stock market is mostly just a waste of time. Financial markets are like a casino where the odds are stacked against you and your win is only the result of someone else’s loss.

I’ve always been a fan of investing in large-cap stocks, especially those that pay dividends. Even though I spend most of my time researching smaller companies, I’ve seen stock market portfolios with a handful of large-cap stocks create a lot of wealth for people. And the dividends compensate you for the prevailing rate of inflation and, for the most part, you sleep well at night knowing what you own. (See A Company Doesn’t Have to Be Small to Provide Big Returns.)

I don’t own shares in McDonald’s, but I wish I did. Not only is it impressive for such a large-cap stock to perform so well, but this company is renovating restaurants and expanding while other chains are struggling in this lackluster economy. The company reports its next set of financial results on January 24 and it’s a benchmark stock that I will be paying attention to.

Over the last 12 months, the stock market was flat, while McDonald’s appreciated 35% not including dividends. Over the last two years, McDonald’s appreciated 60% on the stock market and, over the last five years, the stock went up 141% not including dividends. All this proves that you can do just as well owning the right large-cap stocks as you can speculating in the latest high flyers. And you can do so with a lot less risk.

Stock picking

If I were stock picking in this kind of lackluster market for stocks, I’d be focused on momentum plays. I’d rather bet on a stock that’s already gone up with a strong following than make a value trade or bet on a turnaround. This means that I would be consistently making lists of stocks that are hitting new 52-week highs and watching the news wires.

Last year, one of the best market sectors for speculators was gold and to a lesser extent other precious metals. As an investment theme, I think stock picking among gold and silver miners remains one of the best strategies over the next three years. The fundamentals for gold (and silver) are still very much intact. (See Central Bank and Inflation—the Top New Fundamentals for Gold Stocks.) Spot prices for gold and silver have been experiencing a well-deserved correction and, no matter what the individual story, these kinds of stocks always trade on spot prices. While I’d be trading momentum stocks this earnings season, I’d consider stock picking in gold and silver over the coming months with a 12- to 18-month time horizon for investment. The timing is almost right for a reacceleration in precious metal prices.

I think we’re going to see more economic news that shows a relatively strong close to 2011 and this should provide some further stock market momentum, at least for the first half of this year. Individual stock picking is still the key. For the second half, all bets are off—or rather, it’s too unpredictable for a current view.

The European debt crisis remains the financial world’s most serious investment risk at this time. But there is another major risk brewing out there and it has to do with the country of Iran. Western political leadership is ramping up the tough talk on Iran and they are taking action with strong economic sanctions. It’s my fear that this geopolitical threat could derail what I think is a slow and methodical recovery of the U.S. stock market.

Economically, the European debt crisis and the currency instability that this could create present the most serious threat right now. But the geopolitical threat of Iran is just another reason to consider some new stock picking in gold over the next two quarters.

Getting back to stock picking in today’s market. Investor sentiment is strong enough at this time for some decent event-driven trading. Gold and silver prices are likely to keep churning for the next couple of months; then I think it’s probable they will start ticking higher once again and equity speculators can consider some new positions. Stock picking in today’s trendless market is difficult, but the events are out there. Keep the gold trade in the back of your mind for later this year; the fundamentals for this sector haven’t changed.

Investor sentiment

In spite of the volatility in investor sentiment, the general price trend has been mostly higher since mid-December. The stock market is seemingly off to a good start this year, but no one knows how things will end up. (See The Only Catalyst That Will Move This Market—It Isn’t the Fed.)

The systematic risk in the financial system remains due to the European debt crisis and this will continue to be a major potential shock that could take hold at any time. A Greek sovereign debt default would actually be a very small event dollar-wise, but it would be symbolically significant and a short-term blow to investor sentiment. Knowing this, stock market investors have grown somewhat tired of the issue, and institutions are now content to deal with fourth-quarter earnings season.

If corporate earnings and visibility hold up, then I think the stock market has good potential for a double-digit gain this year. Especially when it comes to investor sentiment, financial markets experience waves of enthusiasm and, after a tough year in 2011, there is an appetite in both the U.S. and European markets for equities. At the end of the day, not much else pays in a world with such low interest rates.

China’s economic news flow is now entrenched in domestic capital markets and it does affect global investor sentiment. That country’s news on inflation, interest rates, housing prices, and GDP growth represents important, actionable data that move the U.S. stock market. Times are changing quickly and, from my perspective, it really is a new era when a country like China affects domestic investor sentiment and the stock market. The world just keeps getting smaller.

I would really like to see the S&P 500 Index break and hold above the 1,300 level. Investor sentiment is good enough right now. If the stock market can do this, then I think we have the makings of a solid new base, at least for the first half of the year. Earnings expectations have come down for 2012, but corporations are still sitting on piles of cash with improving balance sheets. You could argue that U.S. large-cap companies have never been healthier. They’ve had to deal with so many shocks in recent years that most are running their operations about as lean as they can be. With the exception of the big banks (which did it themselves), corporations are, for the most part, very well positioned for the future. The stock market isn’t necessarily, but companies are.

If we are going to get a sustainable new base for the stock market, then investor sentiment will have to be buoyed by a combination of improving economic news, solid corporate earnings, and stability in the eurozone. I suppose that’s a lot for an investor to ask for, but, then again, we’ve been dealing with a lot of shocks lately. We’re due for a little calm, at least before the next storm hits.

Last year, corporate earnings were very good, especially considering the minimal GDP growth experienced in the U.S. economy. But the marketplace was more focused on the uncertainty created by Europe’s sovereign debt problems. Weak investor sentiment usurped the reality of good corporate earnings and strengthening balance sheets. This is why I wouldn’t be surprised at all if the stock market performed similarly to last year—a decent start, followed by consolidation, and then correction. Corporate earnings will be solid in 2012, but no one wants to buy them.

Individual investor participation in equities has been declining for years. This is no surprise considering the stock market hasn’t appreciated for over a decade. The hottest asset class in the last 10 years was mostly real estate, and then its collapse was met by significant price strength in commodities. It’s as if the general marketplace ignored corporate earnings and, accordingly, the stock market did nothing. (See How Stocks Are Reflecting the Structural Excesses of the World.)

I’ve been a student of the equity market my entire adult life and I can tell you that I’m not very enthusiastic about the prospects for the stock market over the next few years. Corporate earnings should continue to hold up well, but the marketplace just isn’t interested. There are too many underlying problems (mostly related to debt) in the global economy and I think it’s fair to conclude that investors should not expect anything from the broader stock market over the medium term.

Don’t get me wrong; I’m not saying that there aren’t good trades out there (I just discovered a medical device company whose business is booming), only that investors should not expect the broader market to provide any tailwind for their holdings. There are always good trades in the stock market, even in a bear market, but I wouldn’t be a buyer of an index fund.

A lot of change has occurred over the last 15 years. I’ll never forget the exciting trading action in the stock market from 1995 to 2000 during the technology bubble. That was a once-in-a-generation kind of market. Then the real estate market became the next asset class to boom into a bubble and now we’re probably mid-way through a booming commodity price cycle. When I think about what’s next, I remind myself that there aren’t many asset classes left.

I do feel that corporate earnings will continue to be solid, but the broader stock market isn’t the place to be. Further economic recessions are likely in the not-too-distant future and, as financial markets correct, a greater weighting towards commodities should pay off better.

Target Corporation (NYSE/TGT) is the latest big company to announce another major share repurchase program. The retail sector is improving, but this doesn’t mean that companies want to make any major new investments. In this environment, the safer play is to buy back your own shares on the stock market.

Target’s board of directors authorized a new $5.0-billion share repurchase program just as its previous $10.0-billion repurchase program winds down. According to the company, from November of 2007 until the third quarter of 2011, it repurchased more than 185 million shares at an average price of $51.53 per share (the current stock market price is around $50.00 per share). This represents about 22% of the company’s outstanding common shares during the period and the new $5.0-billion share buyback program will last the next two to three years.

Target also announced it would pay 2012 first-quarter dividends of $0.30 per common share, representing its 178th consecutive payment of dividends since October of 1967 when the company listed on the stock market.

Another big name retailer, Macy’s, Inc. (NYSE/M), recently boosted its quarterly outlook and doubled the amount of dividends it pays to shareholders. (See 2012: Already the Year of the Mighty Dividend.) The stock market rallied around Macy’s news and the shares are now trading right at their 52-week high of approximately $35.00 per share.

For investors and Wall Street, increased dividends and share repurchases are pure gravy. They generate more income, more fees and more commissions. It’s all so easy. The problem is that this doesn’t help the Main Street economy nearly as much as direct investment by corporations in new plants, equipment, employees, and training. The economy, in my view, won’t accelerate without this kind of spending by big companies and they won’t make new direct investments unless there is more certainty in the global marketplace.

So, I think it’s going to be a pretty decent year for stock market investors who are focused on companies that pay higher rates of dividends to shareholders. All that cash has to go somewhere, so it might as well go back to the owners. Shareholders don’t hire boards of directors who hire managers to watch over cash in the bank. This is especially true in the current interest rate environment, which doesn’t pay more than the rate of inflation.

Large-cap companies are poised to significantly increase their stock market repurchase programs and increase their dividends. It’s a good development for Wall Street and income investors in a slow growth economy. Corporations know that the stock market isn’t overpriced, so instead of risking the cash on new business investment, it’s much safer to just return more of it.

And it doesn’t have to be fancy either. Consider a market leader like Kraft Foods Inc. (NYSE/KFT). It’s a mature, “boring” business that performance-wise has been one of the best stocks in the large-cap universe over the last two and a half years. The stock’s been consistently yielding over three percent and is up about 20% over the last 12 months not including dividends. That’s impressive for a $67.0-billion company.

Other market leaders like PepsiCo, Inc. (NYSE/PEP), Deere & Company (NYSE/DE), Kimberly-Clark Corporation (NYSE/KMB), Abbott Laboratories (NYSE/ABT), Canadian National Railway Company (NYSE/CNI), Southern Company (NYSE/SO) and McDonald’s Corporation (NYSE/MCD) are some great examples of dividend paying stocks that have consistently been good buys when they’re down. According to the long-term charts, these stock market leaders aren’t typically down for very long and, in my view, they are definitely worth considering when they’re off their highs.

There’s a lot to be said for consistency in the investment business. That’s why investors often prefer real estate (rental cash flow) to the stock market. Consistency of returns is the one thing that isn’t very common when dealing with equity securities. Few investors have the patience to wait for good businesses at attractive prices. When people come into money and they want to invest, immediacy takes over. I saw this consistently when I was a stockbroker and it’s the wrong way to go about making longer-term investments in the stock market.

Market leaders change over time and obviously stock market investors have to manage their portfolios accordingly. Right now, in this economy, the most attractive stocks in my mind are brand-name market leaders with proven track records of long-term wealth creation for shareholders. Wait for them to go down in price, then build a position.

This is a stock market with very little in the way of a tailwind. Investment risk for equities remains high and the outlook for economic growth is minimal. Market leaders are important in an investment climate like this, not to the exclusion of other stocks, but because expectations are so low. Naturally, there’s no rush.

Earnings season is always an exciting time of the year and, this time around, the numbers should be better than expected. Not every sector is going to have a good fourth quarter, but the industrial economy should once again deliver solid growth to stockholders. Oracle Corporation (NASDAQ/ORCL) reported disappointing numbers in its latest quarter and the stock sold off on the news. But, then again, Macy’s, Inc. (NYSE/M) surprised the marketplace by increasing its outlook in the retail sector and even boosted its dividend. So, just like the Main Street economy, things are still choppy out there, but the general trend this earnings season should be a positive one. (See What Recession? These Stocks Hitting All-time Record Highs—a Great Indicator.)

The stock market, as measured by the S&P 500 Index, will have achieved a real breakout if it can breach and stay above 1,300. If this happens, this large-cap index will have broken out of its correction trading range last year and set itself up for a new trend (which I think will be positive). Fourth-quarter earnings season is looking solid and therefore share prices should advance if there’s no major new shock from Europe. Predicting what’s going to happen to the stock market later this year is impossible. There remains too much uncertainty. This is why institutional investors are buying now, because the near-term outlook has improved. There isn’t any long-term outlook because there can’t be.

I wrote previously that the stock market in 2012 could perform similarly to how it did in 2011, with a strong start to the year, followed by consolidation, then weakness. It’s all up to this year’s economic data and the eurozone debt crisis. I’m worried less about the other major card: financial results this earnings season and next quarter.

According to Bloomberg, S&P 500 earnings have beaten estimates for the last 11 quarters, which is an impressive performance. But, despite a continuous number of solid earnings seasons in 2010 and 2011, the stock market has been held hostage by other factors. Really, investor sentiment has been downright awful since the stock market cratered in 2008.

I have high hopes this earnings season, and large corporations continue to boast excellent balance sheets. With an uptick in business (in the fourth quarter of 2011), cash balances should continue to swell and that means two important things will happen this year: more share buybacks and increasing dividends.

Institutional investors

It’s actually a good time for institutional investors; running money for clients is easier when expectations are very low. Right now, nobody expects the main stock market averages to do much. It therefore becomes easier to beat the S&P 500 benchmark in a generally low return environment. All institutional investors have to do is own the right basket of stocks. And, clearly, higher dividend paying stocks will continue to play a key role in outperformance this year and next.

For any investor, stock-picking among blue-chips is a more welcome exercise over finding the next big thing. There’s a lot of information publicly available and, because of the exposure that large-cap companies have, it’s easier to predict the flow of cash from these enterprises. In addition, investment risk is different. An investor in blue-chips isn’t just betting on an entrepreneur, but typically a well-educated management team with lots of experience. Regardless, what’s old is new again and the best stocks in this kind of market are in fact blue-chips that pay increasing rates of dividends. It isn’t a fancy investment strategy, but, over the last few years, it’s proven to work beautifully. (See All Global Investment Risks Point to a Steady Dollar Mediocrity in Stocks & Metals.)

The stock market today is still suffering from an identity crisis related to a lack of certainty in the global economic landscape. Accordingly, we’re going to have choppy trading action replete with reversals. Predicting where the broader market is going to go this year and next is almost foolish. If corporate earnings grow 10%, the stock market could still tank on the eurozone debt crisis.

It is a good stock market in which to be an institutional investor, picking stocks in a slow growth environment. It’s a much more difficult environment to be an individual investor, because you don’t get paid to buy stocks. Investor sentiment among institutional investors is improving, while recognizing that investment risk in capital markets remains high. We have a stock market today where almost all eventualities are possible and this has made investors gun shy. Accordingly, conservative blue-chips are looking more and more attractive because they provide relative certainty that a global marketplace that cannot.

Over the coming quarters, institutional investors will be talking about dividends in the stock market. The hottest stocks this year are likely to be the most boring. But, then again, in business, all that really matters is what works. The high-flying days of the dotcoms have been usurped by railroad stocks. For institutional investors, life is now a lot easier. For individuals, there’s no wind at your back.

There’s no money to be earned by investing in money markets, so big corporations have no other strategy left but to return the cash to shareholders. The year 2012 is likely to be unremarkable for the stock market, but for income-seeking investors, this year might just be coined the “Year of the Mighty Dividend.”

The stock market has decent potential for a low, double-digit gain this year, reflecting a reasonable valuation and the expectation for about 10% earnings growth. Dividends will only add to the returns, and for many stock market investors, they will be difference between mediocrity and outperformance.

Last year saw institutional investors migrate to large-cap companies that pay dividends, largely because of the uncertainty in the world and low expectations for capital gains from the rest of the stock market. The trend towards increased dividends has already begun this year with Macy’s, Inc. (NYSE/M) increasing its fourth-quarter profit forecast and doubling its dividends. The company also said that it would increase its share buyback program by $1.0 billion to $1.6 billion. No wonder this stock just hit a new 52-week high. The stock market isn’t rewarding new business investment. Investors are happy to have their cash back.

I’ve learned over the years that good timing is perhaps the most important determinant in generating investment returns from the stock market. Naturally, it’s one of the most difficult things to get right. Right now, I wouldn’t be an advocate for investing in stock market index funds or index ETFs. There’s just not enough upside potential. I would advocate the slow creation of a conservative equity portfolio that is heavily weighted towards earning higher than average rates of dividends. If the broader stock market does well, then these kinds of blue-chips will also do well. If the stock market does poorly, then I’m relatively assured of beating the rate of inflation with dividends. A company like Bristol-Myers Squibb Company (NYSE/BMY) is the perfect example. Pull up a chart on this higher-dividend-paying stock and you’ll see its success in an otherwise very difficult environment. (See All Global Investment Risks Point to a Steady Dollar & Mediocrity in Stocks & Metals.)

Regardless, it’s my view that the stock market will continue to reward companies that are increasing their dividends and buying back their own shares, along with generating reasonable rates of growth in revenues and earnings. Institutional investors want one thing in the current environment and that’s certainty. Unfortunately, we aren’t likely to get much of it this year. With investment risk in equities very high, companies with increasing rates of dividends are likely to be better rewarded than those that continue to sit on their cash positions.

But, while market sentiment is improving currently, investment risk in equities remains very high. The sovereign debt crisis in Europe is not over; it’s only begun to be addressed by eurozone policymakers. And the real crisis, in my view, consists of the sugarcoating economic policies in both Europe and the U.S. The debt crisis is actually being addressed with more debt and easy money. Austerity is happening, but it isn’t enough. How have eurozone policymakers addressed their sovereign debt crisis so far? By issuing more debt that’s referred to as a “bailout.” The same thing happened during the U.S. subprime mortgage meltdown and similarly today with artificially low interest rates and a massive increase in the M2 money supply. These policies are designed to help in the short term, but will be detrimental in the longer term.

This is why stock market sentiment is improving right now and why the U.S. stock market has good potential for upside this year. But looking ahead to 2013 and 2014, the economic picture becomes cloudy and so does market sentiment. What happens when interest rates go up to help deal with inflation? Market sentiment will decline and so will the stock market. In my view, the short-term economic policies of today are creating the longer-term economic stagnation of tomorrow.

This is the main problem affecting the investment decisions of institutional investors. There is no definable economic outlook upon which investors can make their bets. So, we’re likely to once again get choppy trading action in the stock market, with large-cap, dividend paying stocks as the outperformers. It’s a real problem. Why bother with the stock market at all if the economic outlook is so uncertain? It’s a very valid question. You might just be better off collecting gold coins. (See The Best Bet in Town—Resources—Getting Ready for the Big Squeeze.)

My best guess is that market sentiment will be strong enough over the next year or so to carry the stock market higher, so that the S&P 500 Index will complete its right shoulder formation. As I’ve written before, it’s an ominous-looking pattern that doesn’t particularly inspire confidence. Despite the larger scale, it’s very similar to the trading action experienced from the mid-60s to late 70s; which was a long period of choppy, zero returns.

So, my near-term outlook for the stock market is positive. Market sentiment should slowly improve commensurate with economic data. We’ve already seen an improvement in economic news during the fourth quarter. Longer-term, however, the structural problems facing both Europe and the U.S. economies are significant. Market sentiment is better now only because of irresponsible monetary and fiscal policies. Unless this changes, a real head-and-shoulders formation is likely and this implies that the right shoulder will at some point, break its neckline.

I wouldn’t be surprised at all if the stock market in 2012 performed similarly to 2011. Last year, stocks moved nicely higher for the first two months of the year, consolidated, then corrected. And it wasn’t as if there was some major reduction in expectations for corporate earnings; it was the sovereign debt crisis in the eurozone that held the U.S.stock market back. Even with lackluster economic news, I firmly believe that share prices would have been stronger last year if European policymakers (especially in Greece) did a better job. Naturally, these kinds of things are beyond the control of investors. Politicians, it would seem, are extraordinarily gifted at creating uncertainty in capital markets. (See The Debt Crisis & the Great Euro Reckoning—What the Fallout Means to Americans.)

The New Year is always about new beginnings and I feel there is a solid possibility that the stock market will advance over the coming weeks. We’ve had some earnings warnings, but mostly, they’ve actually been revenue warnings or specific corporate events (like the warning from Intel Corporation [NASDAQ/INTC] due to a weak supply of hard drives from Asia). Companies, especially big-cap companies, are very good at maintaining their corporate earnings, even if revenue growth is falling. With the stock market trading at a fair price and fourth-quarter corporate earnings likely to surprise, we have the makings of some breakouts in the major stock market indices.

The S&P 500 Index is definitely fighting to break out of its recent trading range and, while trading volume has been exceedingly light, 1,300 on the index is an important benchmark. It will be a very positive development if the index can hold above this level.

According to Bloomberg, the S&P 500 Index traded at an average price-to-earnings ratio of 14.1 in 2011. The index has a 50-year mean price-to-earnings ratio of approximately 16.4. Bloomberg calculates that the current Wall Street consensus for corporate earnings growth in 2012 is 9.7% to $108.38 per share on S&P 500 earnings, which is an all-time record. This puts the stock market’s current price-to-earnings ratio at approximately 11.6 times forecast corporate earnings for 2012. Regardless, the stock market is not expensive or overvalued historically.

We’ve had some surprises already in some industries (like retail and transportation), but also some disappointment (large-cap technology). My feeling is that 2011 fourth-quarter corporate earnings will come in stronger than expected and so will the first quarter of 2012. If we don’t get another war and the eurozone debt crisis doesn’t take over, the stock market has solid potential for a 10% gain this year. That is, of course, if the politicians don’t mess it up.

If you pull up very long-term charts on the main stock market indices, it seems like the trading action over the last 11 years is one big correction trying to bring share prices back to their moving average. From the mid 1980s to 2000, the stock market produced incredible capital gains and the performance was so out of step with its historical track record. Today, we’re in an economy and a stock market that are trying to return to their long-run equilibrium, after major excesses. Accordingly, it seems very likely that we’ll continue to get lackluster returns from the stock market for several years to come. (See It’s a Large-cap, Dividend Paying Market—the Economy & Commodities Have Made It That Way.)

Since year 2000, history has revealed that owning commodities and flipping real estate have been the best plays. But, there were a number of individual companies that far outperformed the main stock market averages. And many of these companies were well-known, brand-name firms that pay significant dividends to shareholders. It’s my contention that, for the next three to five years, many of these stocks will continue to do well, while the rest of the stock market languishes.

One of the previous decade’s standouts is Caterpillar Inc. (NYSE/CAT). This company was trading at a split-adjusted price of around $20.00 per share in 2000 and proceeded to advance to over $116.00 per share, while increasing its dividends. This was an exceptional performance considering that this business is extremely capital-intensive. Like almost all stocks, Caterpillar saw its share price tank during the subprime mortgage meltdown. Then it more than tripled.

Apple Inc. (NASDAQ/AAPL) was a huge standout, particularly since 2005 when the stock proceeded to appreciate from under $50.00 a share to over $400.00. Like many pure-play technology companies, Apple didn’t pay dividends, but this could change over the coming years.

Another very successful company that doesn’t pay dividends but was a huge wealth creator over the last 11 years was Green Mountain Coffee Roasters, Inc. (NASDAQ/GMCR). This stock was an institutional favorite.

While paying growing dividends to shareholders, companies like United Technologies Corporation (NYSE/UTX), McDonald’s Corporation (NYSE/MCD) and Canadian National Railway Company (NYSE/CNI) were among many large-cap standouts. CNI managed to appreciate some eightfold over the last 11 years, in addition to paying dividends to stockholders. This is downright amazing considering that the company operates in the most mature of industries.

While there are always individual standouts in any stock market, owning the right large-cap companies that pay dividends will likely be the best strategy for the next three to five years. I hate to think about it, but austerity is being forced on the global economy after years and years of excess, both at the country and individual levels. Accordingly, the outlook for stock market capital gains is extremely muted. And, with the likelihood of rising inflation (which is already happening), just maintaining your wealth will become a more difficult chore. This is why dividends are so important to the equity market going forward. The stock market is still trying to balance itself out after its period of excess. If you don’t get dividends from your equity holdings over the next three to five years, your wealth is at risk.

Currently regarded as the world’s third largest software company, Oracle disappointed the stock market with its fiscal second quarter ended November 30. The company’s software revenues grew only two percent in the latest quarter and missed the consensus estimate. Earnings (excluding some items) came in at $0.54 per share, coming in weaker than the consensus estimate of $0.57 per share. This doesn’t bode well for the large-cap technology sector.

I follow a number of benchmark stocks, which I view as very helpful in honing my own stock market view. Like a broad, stock market index, I keep a weekly eye on about a dozen big-cap companies (most pay dividends) from a variety of industries. I follow several conglomerates, consumer products companies, technology firms, oil and gas, and pharmaceutical and railroad companies. As benchmark stocks, I keep track of their corporate developments and I can tell you that this process is very helpful in defining my stock market outlook. It also helps keep track of which industry sectors are doing better than others.

Right now, I would avoid the technology sector. While some companies are doing relatively well on the stock market, such as International Business Machines Corporation (NYSE/IBM) and Apple Inc. (NASDAQ/AAPL), a lot of other benchmark stocks within the sector are not. This would include: Hewlett-Packard, Dell Inc. (NASDAQ/DELL), Advanced Micro Devices, Inc. (NYSE/AMD), Juniper Networks, Inc. (NASDAQ/JNPR), and Research In Motion Limited (NASDAQ/RIMM) to name a few. The stock market, in my view, reflects the choppiness of the real economy. Some industry sectors are doing better than others, with only a handle of companies really outperforming.

This is why it’s important to follow benchmark stocks like Oracle, Intel Corporation (NASDAQ/INTC) and Hewlett-Packard. These three companies alone will give you a tremendous insight into the health of the technology sector, both at the retail and corporate level.

Whatever you might consider to be benchmark stocks, it pays to keep following them, even if you aren’t very interested in taking on a position. The strategy behind keeping track of your benchmark stocks is to discover the real economic trends that are taking place in important industries. Like railroad carloading rates or hard disk drive shipments. All these data are extremely useful because, for the most part, the headlines don’t report it. Media reports generalities about the stock market and corporate developments, but they rarely dig past the headlines. (See Debt Crisis Aside—Let’s Get Down to Business with the Real Numbers.) This is how you can be confident taking on or avoiding positions in the stock market.

The stock market’s been looking for a reason to go up and, while some economic news lately reveals a positive trend, the numbers still reveal much lower-than-usual levels of business activity. It’s going to take a number of quarters yet for the real estate market and employment to balance themselves out. But even so, any uptick in economic news will move share prices markedly higher—institutional investors are chomping at the bit. (See If Europe’s Fixed, Stocks Should Resume Their Upward Trend)

Trading action now is also accentuated by relatively low volume, which always occurs around the end of the year. There’s also a fair amount of portfolio posturing that takes place among institutional investors and this has a tendency to skew share prices. You can expect big price swings over the next few weeks.

A key point in my mind is 1,200 on the S&P 500 Index. If this main stock market index can keep above this level, then I would say it is holding up quite well all things considered. The sentiment is there for rising share prices and what this market really needs is more economic news confirming an uptick in business activity. With large corporations still saying that business is pretty good, my bet is that the fourth quarter will reveal quite an improvement in gross domestic product (GDP). This doesn’t mean that the trend won’t change next year; only that some pent-up austerity has been let out in this latest quarter.

In spite of the frustration stock market investors must be feeling, it’s only been two and a half years since the low set in March 2009. What transpired late in 2008 and early 2009 can only be described as a complete and total breakdown in capital markets. In my view, we are extremely lucky to be where we are considering the very poor health of financial institutions at the time. Economic news since then hasn’t been very rosy, but the shock of the subprime mortgage meltdown was so severe that I’m thankful the economy isn’t in a full-blown depression at this time. The stock market might still be experiencing a gigantic “rolling over” in its long-term trend, but it did the same thing from the mid-60s to early 80s. This was a difficult period for equities and the performance of the S&P 500 Index over the last 11 years has been quite similar.

Like I say, any upward price momentum in the stock market must have more positive economic news to be sustainable. Domestic investors have been so focused on Europe and China lately that their attention has left the U.S. stock market fairly valued and that’s the great opportunity we have before us right now. Because stocks aren’t overpriced, any positive economic news will translate into positive trading action in the near term.

For example, Intel Corporation (NASDAQ/INTC) surprised the stock market saying that its fourth quarter would come up short due to shortages of hard-disk drives from Thailand (here’s an investment theme to consider—solid-state drives [SSDs] are beginning to take off in popularity). This brought down the entire semiconductor sector; although it’s reasonable to conclude that Intel’s dividend payments are secure.

We also had E. I. du Pont de Nemours and Company (NYSE/DD) cut its 2011 forecast, but then the company announced that it would beat 2012 consensus earnings.

So, like the rest of the stock market, it’s a mixed bag of performance out there. Even though expectations for 2012 corporate earnings have come down, they are still robust enough to be attractive, especially once you factor in dividend payments.

This is the key to outperformance in this stock market, perhaps even for the rest of this decade. Dividend payments are the only reason why stock market index investors beat the rate of inflation over the last 11 years. The main stock market indices didn’t do a thing during this period.

I maintain a list of favorite large-caps that boast long-term track records of increasing dividend payments to shareholders. These are best in class, well-managed companies that have a tendency to produce more consistent rates of return, rather than try to hit home runs. These are the companies I want to invest in when their share prices are down.

There really isn’t a catalyst to do much in this stock market, but if you did want to create a new equity portfolio, you’d want to overweight it with dividend paying stocks. What many large corporations are doing in this economy is hoarding cash. They are equally afraid to invest in a marketplace with so many uncertainties. Instead of investing in new plant, equipment and employees, they’d rather play it safe and maintain their earnings. This is why it’s increasingly likely that we’ll see many large-cap companies announce higher dividend payments to shareholders next year. And it’s all because there’s no growth out there and interest rates are artificially low.

Right now, holding cash doesn’t pay and it doesn’t keep stock market investors happy. What do pay are common share repurchases and rising dividend payments. This keeps shareholders relatively happy in a slow growth environment with low expectations for capital gains.

Equity investment risk remains very high at this time, but oddly; the fundamentals for investing in blue-chips are improving.

(Recommended reading: How to Pick the Best Stocks That Pay Dividends)

Declining investor sentiment since the eurozone summit on the debt crisis is the catalyst for the stock market’s recent trading action—a market that’s actually gone down on some good news. This is always a sign that the bears are in charge.

What the stock market and commodity markets are experiencing is the continued lack of certainty in the global economic playing field. With no real trends emerging in economic data or from policymakers, institutional investors have been running to the sidelines once again. Against this backdrop, investor sentiment can’t really do anything but drift into malaise.
The uncertainty remains a very serious risk for global investors. The eurozone could equally stabilize or fall apart completely. The U.S. housing market could show some improvement in the first half of 2012, or home prices could accelerate their decline. All scenarios are possible in the current environment and this is why investor sentiment has been hit so hard lately. Without relative certainty in the marketplace, the main indices are drifting.

Playing this kind of market is extremely difficult. In any stock market, there are always event-driven trades, with some companies announcing good news and others doing the opposite. The key in this kind of market is to use declining investor sentiment to your advantage and this means identifying the companies you would like to own in advance, while waiting for an attractive price point at which to buy. This is the best play in this kind of stock market and it’s mostly with larger-cap, higher dividend paying stocks.

There still is no reason for any new, bold action with investor sentiment being so lackluster. With declining expectations for GDP growth and corporate earnings, the stock market seems increasingly likely to drift into the New Year. It wouldn’t surprise me if the Federal Reserve were to announce some kind of new monetary policy action, and the stock market almost always reacts positively to such events. Still, I think we haven’t yet seen the worst of the trading action. The stock market could easily test the bottom end of its recent correction trading range. (See How Stocks Are Reflecting the Structural Excesses of the World.)

Domestic investor sentiment is still being held hostage by the eurozone’s debt crisis. It can turn positive, but will require a stream of positive economic data in order to do so. I’ll be impressed if the S&P 500 Index can stay above the 1,200 level, but I don’t expect investor sentiment to change in the near future. If the S&P holds 1,200, it could be a new base for the index, but I wouldn’t cross any fingers.

One market sector that experienced a major wave of wealth creation, followed by an equally spectacular wave of wealth destruction, was the solar energy market sector. For a while there, anything to do with solar panels or the alternative energy market sector was super hot for speculators. Then we had the big stock market meltdown in late 2008 and 2009, which corrected this speculative market sector, and it was never able to recover like the rest of the stock market.

Recently, most of the solar-energy-related stocks have been dropping off a cliff, as the industry has been hit by the perfect storm—a weaker global economy, cuts to government subsidies and heavy competition, which has lowered operating margins.

First Solar, Inc. (NASDAQ/FSLR) is a domestic manufacturer of solar cells and power systems. This company just announced another major cut to its revenues and earnings estimates for 2011, citing a weaker economy and strong competition from China. The stock grew to approximately $300.00 a share in 2008, then corrected to about $150.00 during the subprime mortgage crisis. The stock bounced around the last couple of years and was trading at $150.00 per share at the beginning of this year. Now it’s trading below $40.00 a share. This it is a spectacular example of a short selling opportunity. In fact, the entire solar energy market sector was a great short sale, with other major players like JA Solar Holdings Co., Ltd. (NASDAQ/JASO), Trina Solar Limited (NYSE/TSL), and Yingli Green Energy Holding Company Limited (NYSE/YGE) all having dropped significantly on the stock market this year.

I’ve never been a fan of short selling, but lots of people are. It is a useful tool to help stock market traders benefit from excessive valuations. The easiest way to look at short selling is as identifying a market sector that’s experienced tremendous upside, then waiting for it to correct. Just like in the solar energy industry. The great thing about short selling the solar energy market sector was the confirmation achieved by most of the other stocks within that universe. They all began to correct at the same time and this makes a short selling trade much easier to initiate.

We’re in a stock market now with no major trends, either up or down. For traders, the opportunities are event-driven without a tailwind, but they are out there nonetheless. Like I say, the best way to identify potential new short selling trades in this environment is to identify market sectors with stocks that are moving in a group. With the latest revenue reduction of Intel Corporation (NASDAQ/INTC), an attractive short might be in large-cap technology. Of course, the hardest part about stock market speculating is deciding when to make the trade. Nobody said this business was going to be easy.

I know that the past can’t predict the future, but I’m a big believer in a company’s long-term track record of success (both operationally and its history on the stock market) as an important factor in considering new equity investments. I’m not talking about trading here; I’m talking about investing for the long haul in well-managed enterprises that pay dividends; that have created a lot of wealth shareholders. With a solid, long-term track record of wealth creation on the stock market (almost always a combination of capital gains and dividends), a company offers investors a level of comfort that is not demonstrable from other securities. History suggests that, in many cases, large companies that pay dividends and boast relatively consistent share price appreciation can really pay off when their shares are temporarily down in value on the stock market.

Consider the following examples of companies that pay dividends. In my view, they all boast excellent, long-term track records of wealth creation on the stock market. They have increased their dividends over time, and shareholders could have been reinvested these dividends, thereby compounding the gains they provided: Colgate-Palmolive Company (NYSE/CL); PepsiCo, Inc. (NYSE…PEP); United Technologies Corporation (NYSE/UTX); Canadian National Railway Company (NYSE/CNI); McDonald’s Corporation (NYSE/MCD) 3M Company (NYSE/MMM); and ConocoPhillips (NYSE/COP), to name a few.

Pull up a long-term stock chart on any of these companies and you’ll see the price performance. Many of these longer-term stock market winners belong to the Dow Jones Industrial Average and they all pay varying rates of dividends to shareholders. Over the long haul, the charts show that they’ve all paid off handsomely after they’ve been down in price on the stock market. In fact, most of these companies haven’t been down in value for very long at all.

Previous stock market winners that have consistently increased their dividends are the kind of companies that I think are worthy of consideration in the current environment. As much as the global economy produces great new technologies, people still need toothpaste, soda, elevators, burgers and petroleum to get through the day (see Soda or the Latest Hot Software—Guess Which Industry Pays Off Better Over Time?). In an era of declining expectations, a strong track record of wealth creation is very important.

We are in an age of austerity now where what’s old is new again. It’s going to last for quite a number of years yet and it’s going to continue being a difficult time for stock market investors. That’s why dividends and a long-term track record of success are so important. The companies you want to own are those that have proven they can weather the storms.

In a time of lackluster expectations for economic growth, corporate earnings, and the stock market, figuring out what the best stocks to own (if any) are is a real task. The stock market is so fraught with investment risk due to external shocks that defensive, conservative picks are the way to go if you’re creating a new equity portfolio. And here’s the good news: owning large-cap, dividend paying stocks doesn’t mean you should expect very little in the way of investment returns. History reveals that some of the best wealth-creating assets over the last decade were blue-chip, higher dividend paying stocks of well-known enterprises.

Consider Southern Company (NYSE/SO), which is one of those dividend paying stocks in the utility sector with an outstanding long-term track record of wealth creation for shareholders. This stock has appreciated steadily since the 1980s. On a split-adjusted basis, the stock was trading around $7.50 a share in 1990. It appreciated to $25.00 per share by 2000 and, just this month, the stock hit an all-time record price high of $44.92 per share, all while providing a solid four-percent or higher annual dividend yield to stockholders. And, what’s more; the company’s wealth creation on the stock market was done so in a very steady manner, enabling those who owned the stock to sleep well at night. One thousand shares in Southern Company bought in the early 1990s would be quite a nest egg today and shareholders didn’t need to care what was going on in the rest of the world. Imagine how much greater the nest egg would be if those dividends were automatically reinvested in company shares. This is but one of many great examples of solid, long-term wealth creation on the stock market that significantly outperformed the main stock market averages. Pull up the charts and see for yourself.

I’m not very enthusiastic about the prospects for the stock market over the next several years, but I firmly believe that owning the right dividend paying stocks in this kind of market is the right course of action for equity investors. This isn’t the right strategy for traders/speculators. Higher dividend paying stocks offer the same kind of wealth creation as compound interest; but, today, the bank doesn’t pay you much. In fact, you’re hard pressed to even beat the rate of inflation.

A portfolio of higher dividend paying stocks isn’t the only strategy worth considering going forward; but, with declining expectations around the world, I’d take a solid quarterly dividend from a domestic company over risking whether the eurozone can stay together.

The S&P 500 Index is currently trading around the same level it was in 2008, 2006, 2001 and 1999. While there are always some big winners (including a number of dividend paying stocks), 1999 to 2012 is a long time to go without any material capital gains from equities. With dividend payments, owners of the Index are basically flat considering inflation.

The stock market did outstandingly well from the mid-80s to 2000. This 15-year period emboldened an entire new generation of equity investors—not really with dividend paying stocks, but with higher growth companies, mostly related to technology. The stock market over the past 12 years is eerily similar to the trading action experienced from the mid-60s to late 70s. During this period, there were no overall capital gains for equity investors.

For medium- to long-term stock market investors, I feel that higher dividend paying stocks are the only way to go. And I’m not saying this as part of a conservative investment strategy, but as one that will outperform the rest of the stock market. History is seemingly repeating itself and I think we have several more years of economic and equity market stagnation. With inflation around the corner, dividend paying stocks are the only way to go. For speculators and traders, an overweighting in resource-related opportunities seems reasonable, as the commodity price cycle is still in mid-swing.

The stock market today is not particularly attractive as an asset class. The U.S. real estate market now offers a better chance of achieving material capital gains over the next few years. Dividend paying stocks are attractive, but I won’t fool myself; the expectation for capital gains in these kinds of securities is limited.

Traders can speculate in stocks, bonds, currencies, futures, options and some other kinds of derivatives. But for traditional equity investors, there are declining expectations for economic growth and corporate earnings. Goldman Sachs’ latest research report for the stock market in 2012 is titled, “Strategies For Stagnation.” This makes the point perfectly.

I want to reiterate my view that stock market investors need to be extremely cautious over the near term (the next three months). (See Stock Market’s Forming a New Base, in Spite of Volatility.) Politicians are now the leading influence in capital markets and this is never good. I’m an advocate for higher dividend paying stocks as the opportunities arise; aside from that, those looking for material capital gains should look somewhere other than the stock market.

Several times this year, we had a situation where most investable assets like the stock market, oil, gold and other commodities were trading in lockstep, particularly to the downside. It’s likely we’ll see this kind of trading action again in 2012, as investors come to terms with very slow economic growth. As investor sentiment fades, we could see another major migration to cash and bonds. It’s similar to the “forced liquidation” that Jim Rogers often refers to; and this makes it very difficult to formulate a portfolio strategy at this time.

The stock market today is experiencing a bear market rally, based on events regarding the eurozone debt crisis. As is the case with virtually all politicians, Europe is likely to get only temporary solutions, which unfortunately sets the stage once again for new shocks to the U.S. stock market. With this backdrop, stock market investors need to play a very strong defense over the near and medium terms.

The U.S. economy has proven over time to be exceedingly quick at correcting shocks to the system, but today we’re in a new paradigm—one that’s defined by debt. And, as we all know, getting out of debt isn’t that easy. At the sovereign level, even reducing the rate of growth in government debt has yet to be addressed. This is why I’m thinking that the stock market (which is in a breakout bear market rally right now) could tick higher going into the New Year; with growing risk of another forced liquidation of assets. Stock market investors don’t need to be buyers in this market and they don’t need to rush into commodities either. A bear market rally can suck investors in with the best of intentions, but the fundamentals aren’t yet good enough to go all in. Don’t forget; stocks have been in a bear market since 2000. A bear market rally is now commonplace.

We just completed a correction in the stock market (August to October 2011) and equities are trying to make a breakout right now. (See Investment Risk Going Up—It’s the Kind of Market Where Anything Could Happen.) This bear market rally might have legs until the end of the first quarter next year. I might be wrong of course, but my gut tells me that the current action is a trap. There is more reckoning to be had in the global economy, the stock market, and commodities before a new business cycle can begin.

Excluding shocks like a euro currency breakdown or a new war, for example, I think the stock market can move higher going into the first quarter of 2012. Corporate earnings are strong enough, valuations are fair enough, and current economic data are showing improvement. Higher dividend paying stocks and the Dow Jones Industrial Average will continue to be outperformers in the stock market. Technology, retailers and more cyclical industries will be vulnerable later in the year as the economy toys with recession again.

The Federal Reserve is doing all it can to prop up the economy by increasing the money supply and keeping interest rates artificially low. Yet, theU.S.national debt and deficit are not being addressed. In a sense, there is too much monetary policy action in the system at this time and not enough fiscal policy action, which, in my view, is a recipe for disaster. It’s a formula for long-term economic stagnation, while sowing the seeds of inflation.

This is why I only see positive trading action in the stock market not lasting much past the first quarter of 2012 given the current information. Accordingly, investors still need to be extremely cautious considering new positions and buyers should be focused on dividend paying stocks.

Blue-chips are the best stocks to own in this environment, as are higher dividend paying stocks in a lackluster economy (see The Stock Market’s New Best Friend—Buffett Will Be Pleased). Because I find it unreasonable to expect a new bull market to develop in the stock market, generating any rate of return on equities is a crapshoot at best. Accordingly, dividend paying stocks and cash are the only paper plays for investors. Precious metals are the best stocks for speculators, of course, but that is a sector that trades off the spot prices of the underlying commodities.

Dividend paying stocks have good potential in 2012 because institutional investors will be chasing any kind of certain returns they can find. And, while most big-cap companies have tons of cash on their books, the likelihood of dividend paying stocks increasing their payouts to shareholders is improving. Corporations are acting like investors; they are reticent to step up to the plate and invest in new employees, plants and equipment. As their earnings continue to be robust, these companies will be increasingly inclined to pay more dividends to stockholders.

So, if the world and the stock market don’t fall apart over the next several weeks, I think it’s reasonable to expect incremental stock market gains in the first quarter of 2012. I also think it’s fair to assume that higher dividend paying stocks will outperform in an environment of low expectations for capital gains.

We’ve seen a slight improvement in economic data recently. We also have stable, low interest rates, a reasonable inflation outlook, and solid corporate earnings. With more certainty from European policymakers over the near term, I don’t see any reason why the stock market won’t tick higher going into 2012. The level of 1,300 on the S&P 500 Index is a definite possibility if things don’t fall apart on the sovereign debt issue.

In this scenario, I still see larger-cap, higher dividend paying stocks as being the market leaders next year, because they have the strong balance sheets and the pricing power to accelerate earnings. Big companies still have capacity to fill and they can meet any increase in demand without having to spend much on new plant, equipment or employees. The outlook for corporate earnings next year continues to be very good.

Third-quarter earnings season was usurped by the sovereign debt crisis in Europe, but the upcoming fourth quarter may be the relief that stock market investors are looking for (see If Europe’s Fixed, Stocks Should Resume Their Upward Trend). Third-quarter numbers were good and a lot of corporate earnings beat Wall Street consensus. For the most part, companies played it safe regarding fourth-quarter and 2011 visibility, reiterating their previous guidance for the year. With so much uncertainty lately, I suspect this prudence will set the stage for some big surprises in corporate earnings. Again, the stock market is behind corporate earnings, because of a lack of confidence due to sovereign debt. Larger companies have been doing their part, particularly in the corporate/industrial economy and balance sheets just keep getting better and better with the cost of debt so low.

I can’t say where the stock market will end up in 2012. There are too many potential shocks that could bring down the system. I do expect, however, that, like this year, corporate earnings in the first half of 2012 will be robust and that the stock market could move incrementally higher based on improving fundamentals in the U.S.economy. The first key item the stock market needs is more certainty from the eurozone. The second key is corporate earnings (employment and the housing market will have to wait for things to trickle down), for which the outlook is very good at the moment.

It’s pretty clear by looking at the economic data that the U.S.economy is experiencing an industrial/corporate recovery, while, at the individual level, the unemployment rate remains stubbornly high and home prices remain weak. Strength in railroad stocks is not yet correlated with the Main Street economy. The trickle-down effect is taking its sweet time.

Government bailouts, monetary stimulus, and very accommodative interest rates are somewhat helpful, but they aren’t strong enough to reverse this business cycle. The subprime mortgage meltdown was such a significant financial crisis that it will likely be 2013 before we see any marked improvement in the unemployment rate. While the economy continues to try and balance itself out, so does the stock market. Going forward, large corporations are likely to keep sitting on their cash hoards; reluctant to invest in new plant, equipment or employees for that matter. Making an economic forecast against this backdrop is almost foolhardy.

Railroad companies and railroad stocks are some of the healthiest large-cap businesses domestically. They have an advantage over the trucking industry in that higher fuel costs affect railroad companies to a much lesser extent. Right now, countless Wall Street analysts are increasing their earnings outlook for the railroad sector and railroad stocks are very likely to continue being the stock market’s strongest performers (see The Stock Market’s New Best Friend—Buffett Will Be Pleased). I’d say it’s a good stock market sector to buy on dips; but looking at the charts, railroad stocks aren’t down in price all that often. September was an opportune time to be a buyer. The entire group corrected, and then bounced back sharply.

Recent history definitely shows railroad stocks as leading the broader stock market (and outperforming as well). Pull up a longer-term stock chart on Norfolk Southern Corporation (NYSE/NSC), Union Pacific Corporation (NYSE/UNP), or Canadian National Railway Company (NYSE/CNI) and you’ll see some amazing wealth creation. And the charts don’t include dividend payments.

Railroad stocks are some of the oldest listed companies on the stock market. What is old is seemingly new again in the age of austerity. With a strong institutional following and Street analysts raising the earnings outlook on the railroad sector, these stocks are poised for even more capital gains over the near term.

According to Eurostat, which is the eurozone’s main statistics agency, the current inflation rate in the 17 countries that use the euro currency is running at three percent, while most of these economies are producing little to no growth. Unemployment in the eurozone was 10.2% in September and 10.3% in October and interest rates are falling. It’s the perfect brew for rising inflation.

In a report written by Thomas Biesheuvel at Bloomberg, gold stocks are said to be now trading at their cheapest valuation in the last nine years, even though the spot price of gold is trading close to its historic high. Everything in the stock market has been correcting in price and there’s a lot of good value out there, but no industry is poised for the same rate of earnings growth as gold.

The stock market experienced a price correction due to the European debt crisis and that brought gold stocks down commensurately. But, instead of snapping up reasonably priced gold stocks, gold investors have been buying gold exchange traded funds (ETFs) instead. According to Bloomberg and the Commodity Futures Trading Commission, holdings in gold ETFs grew to a record 2,350.8 metric tons, worth $127.6 billion as of last week. Hedge funds and other institutional speculators have been increasing their net-long position in gold over the last four weeks straight, which is the longest stretch since March. See Stock Market Correction Phase Over? Spot Price of Gold Looks to Be Bottoming.

So, we have positive, developing fundamentals for gold and gold stocks that are undervalued and poised to report record financial results in the fourth quarter. Now is the time to be considering new positions in gold stocks (if you haven’t already), perhaps more so than an ETF that moves with the spot price. Regardless, it’s pretty clear that the stock market has underappreciated the financial performance of most larger-cap gold stocks over the last several months.

The stock market’s latest correction was fostered by the European debt crisis, but what transpired was a severe reduction of confidence—in the prospect for global growth and the ability of eurozone policymakers to deal with the problem. Accordingly, stock market investors have been extremely reluctant to speculate in gold stocks, which I admit is a stock market sector that tends to be highly volatile and unpredictable. If the debt crisis in Europe can be contained, at least for the next few quarters, then I think gold stocks are extremely well positioned for capital gains. Valuations are reasonable and earnings expectations are strong. Investment risk still remains very high in the stock market at this time, but there are very few industries with fundamentals as strong as gold and precious metals.

Many stocks in the Dow Jones Industrial Average continue to outperform the rest of the stock market and institutional investors have been buying yield in the absence of capital market certainty. Some of the best stocks this year have been global large-cap companies that are paying higher rates of dividends to shareholders. With the two major stock market buyers being institutional investors and large-cap companies themselves, we can expect more share buybacks and an increase in dividends throughout 2012 (see Dividends and Growth—the Two Go Hand in Hand in this Business Cycle). There’s just no other place for institutional investors or large corporations to put their cash. They’re not going to load up on inventory or on new employees.

So my near-term outlook for the stock market is baby-step, positive trading action, with share prices going from one small trading range to another. Anything is possible in this market of course, but even institutional investors aren’t expecting to revise their earnings outlook higher in 2012. The prospect of a recession still lingers and then there’s the sovereign debt issue, which is still a major, cascading risk to currencies and the stock market.

Because the end of the year is quickly approaching, a lot of institutional investors will be looking to pad their portfolios with the year’s stock market outperformers. This trend has been going on for years now and you can see it in the trading action. This is why we’re a little more likely to experience positive trading action in the stock market right up until the end of year. Institutional investors have always been the biggest bandwagon traders of them all.

I say this with a grain of salt, because stock market investment risk remains very high at this time. A couple of positive trading days do not make a bull market. And we can’t forget that, despite eurozone austerity measures, sovereign debt in these countries is still going up and is expected to keep going up for the next several years. The purported fix for the sovereign debt problem has so far been an exercise in political posturing. And culpability for political rather than economic solutions certainly lies with global institutional investors who own a lot of eurozone sovereign debt. They don’t really care about austerity measures and the three-to-five-year outlook; these institutional investors (mostly big banks owning lots of eurozone sovereign bonds) care about saving their existing portfolios now. That’s why there is all this political pressure for short-term solutions, rather than economic solutions to reduce debt to GDP levels.

This is the marketplace we’re in. The stock market is recovering from a short-term, oversold condition. Institutional investors in Europe will be looking to save their bond portfolios and domestic investors will be looking to pad their equity holdings with the year’s best stocks. It isn’t much of an outlook, but it’s the reality that exists.

Getting back to gold investments; if there is a forced liquidation of assets, this would be an opportune event to take on significant new positions in precious metals. The inflation situation is getting worse in BRIC countries (less so for China) and the numbers in mature economies are pushing the upper limits of central banks’ ranges. There are good long-term fundamentals for gold investments; over the near term, however, anything can happen. The trading action in the stock market reflects global investor sentiment perfectly—it’s not very pleasant out there at all.

Investment risk has been high all year and it’s going up even further. Now that currencies are at risk and the solutions involve politicians, stock market investors are in a very precarious position. You might think that gold investments would be your best friend in this kind of environment, but because there’s so much uncertainty related to sovereign debt, currencies, economic growth, stock markets, inflation…the probability of another asset liquidation is increasing.

In this scenario, the U.S. dollar would strengthen and, because gold investments tend to trade inversely to the dollar, they would be under pressure, not just because of a forced liquidation of assets. Accordingly, it’s difficult to be bullish on gold investments in the very near term, even though I view them as some of the best stocks (for speculators) that the market has to offer.

The stock market will continue to deteriorate despite attractive valuations and good corporate earnings as long as the sovereign debt issue is not forcefully dealt with. The fact is that capital markets are significantly increasing eurozone bond yields because of a failure of policymakers to decisively address this crisis. And, despite its willingness, the Federal Reserve cannot bail out Europe. I’d say eurozone politicians have until Christmas to get a handle on things or the euro currency is finished…and this not good for the U.S. stock market, gold investments or not.

The structural failure of eurozone leadership is increasing the odds of another global recession and, without decisive action from policymakers, financial markets will gain the upper hand with their own market-based resolutions. In fact, this is already happening with significantly increased bond yields throughout eurozone countries. Even the Netherlands and Finland (AAA-rated countries that are well-managed, mature economies) are seeing their sovereign borrowing costs increase sharply. The marketplace is imposing these financial conditions throughout the eurozone because of the failure of cohesive political leadership. It’s not about austerity measures anymore—it’s about confidence in the entire economic system. Accordingly, the U.S. dollar is strong and the stock market is not.

The healthiest part of the system is large-cap companies. Corporations are doing their duty—they are keeping healthy balance sheets, producing good earnings reports, and paying their dividends. But the stock market isn’t much interested in corporate profits; how can it when we have the prospect of the entire eurozone monetary system falling apart? No wonder stock market investors are sitting on the sidelines; investment risk for equities remains very high.

Stock market valuations are very reasonable at this time, but this alone doesn’t make a bull market. You know you’re in trouble in financial markets when investors look to policymakers for action. But this is where we’re at now. Eurozone leaders have to be decisive and bold or the remaining confidence within the system will very soon disappear.

A stock market investor like Warren Buffett is right to be buying eurozone and Japanese value stocks. But, as we all know, he’s already made his billions and he has the benefit of a very long-term time horizon for investment. For most individuals who participate in financial markets, the goal is to build at least a little wealth to help with retirement. We’re in a situation now where a debt-induced eurozone failure may just be responsible for another major stock market correction.

Negative sentiment is now pervasive and getting out of this cycle is going to difficult. Because the eurozone debt crisis has the potential to be cascading, no one solution is going to restore confidence to financial markets. In addition, now that U.S. sovereign debt has been given a negative outlook by ratings agencies, the prospects for the stock market seem extremely limited. This is why higher-dividend-paying stocks will continue to outperform.

In this high-risk environment, a strong defense is the only strategy. If U.S. and eurozone countries turn to printing more money to get out of the sovereign debt crisis, then the next major problem will be with inflation. (See Debt Crisis in Europe Highlights Continued Strong Fundamentals for Gold.) The silver lining in all this, if there is one, remains the commodity price cycle.

As an investment theme, I believe that the commodity price cycle will be a key trend this decade. The fundamentals are there to support higher prices for precious metals, agricultural commodities, and oil. Even in a world of declining expectations, demand for commodities is rising while supply is stagnant.

In my view, there’s no other industry that’s better set for increasing profitability than precious metals. The stock market is certainly not dominated by gold or silver stocks, but, sector-wise, this area continues to offer equity speculators the best bang for their buck. And now there’s a new trade that’s developing and it’s in silver stocks.

We just had a good new entry point for gold and most gold shares experienced an upward bounce in October (if you want to see the spot price action of gold reflected in a stock, just follow Yamana Gold Inc., NYSE/AUY.) But, right now, one of the more attractive trades I see coming in the stock market is with silver stocks. The universe of silver stocks is very small and the commodity itself is underperforming gold.

Like all precious metal stocks, share prices follow the spot price of the commodity, even if a company is generating exceptional financial growth. Silver stocks have been trending lower since May, commensurate with the spot price, and valuations are now becoming very reasonable. It’s a trade that’s not quite actionable, but it’s getting close. Once the spot price of silver turns, silver stocks should outperform gold because of the disparity that exists between the two commodities.

October’s gold trade worked out and was especially good considering the trading action in the rest of the stock market (see PC-09-30-11 Third Quarter Ends The Correction Phase—Spot Price Of Gold Looks To Be Bottoming). The spot price of silver just broke through (to the upside) its 30-day moving average and is slowly getting closer to its 200-day moving average. And, if you follow commodities daily, you’ll know that the percentage change in silver’s trading action is increasingly greater than that of gold. To me, these very are positive signals. With most silver stocks now sporting very attractive valuations, I think they’re going to be the stock market’s next best trade.

The U.S.stock market should be trading higher than it is. Corporate earnings in the third quarter were really good and they have been all year. This past earnings season was usurped by the sovereign debt crisis in Europe and declining investor sentiment is evidenced by declining trading volume.

Corporate earnings are solid. This doesn’t mean that business is booming or anything like that and it doesn’t mean that all industries are experiencing the same amount of business activity. But, we’ve seen corporate earnings come in impressively stronger than revenues and, from what I’ve read, visibility going into 2012 is decent. (See The Stock Market’s New Best Friend—Buffett Will Be Pleased.) With investment risk high in virtually all financial markets (the reason why Treasury yields are so low), the U.S. stock market is getting the brunt of the world’s declining expectations.

If you pull up a really long-term stock chart on the S&P 500 Index, you can see the runaway price action of the stock market, especially in the late 1990s. It wasn’t as if corporate earnings were accelerating dramatically during this period; it was more so the stock market’s valuation of those corporate earnings that increased the most. This was best illustrated with Internet stocks, the shares of which soared without any corporate earnings at all. Ever since the bubble burst in 2000, the stock market’s been in correction mode, trying to find itself a new equilibrium between reasonable corporate earnings and overly high valuations.

The S&P 500 Index continues to have an ominous looking trading pattern, with the stock market clearly producing a right shoulder formation. Unfortunately, the index’s supported low over the last decade has twice been around the 800 level. For me, just looking at the stock market’s chart for this period doesn’t inspire confidence.

If we go by corporate earnings, then I think it’s fair to say that the stock market today is very reasonably priced. As we’re not in any particular stock market bubble, the fair valuation on corporate earnings is arguably helping to keep the trading action as good as it is.

I have to admit that I have this great fear for the U.S.stock market. If you look at Japan’s Nikkei Index, you see the amazing wealth creation that occurred in the 1980s and the spectacular crash of the stock market ever since. The Japanese stock market has been in a bear market for the last 21 years. Then you have the Chinese stock market, where the China Shanghai Index more than quintupled from 2006 to 2008, only to have given up almost all of this gain. Corporate earnings growth was fairly steady during this period, but stock market valuations were not.

I have faith that the U.S.equities won’t experience that same kind of trading action that occurred in Japan.U.S.multinationals are extremely good at growing corporate earnings, even during sustained periods of global economic weakness.Europe, however, must allow its debt crisis to correct itself, because the policy intervention to date is only sugarcoating the problem. Lack of action on the issue continues to hold the U.S.stock market hostage. So what’s worse than a bubble to bear market? A system that isn’t allowed to correct itself.

You can see it in all sorts of names like Johnson & Johnson (NYSE/JNJ), Kraft Foods Inc. (NYSE/KFT), Intel Corporation (NASDAQ/INTC), The Coca-Cola Company (NYSE/KO), E.I. du Pont de Nemours and Company (NYSE/DD) and ConocoPhillips (NYSE/COP), to name just a few. The stock market is rewarding higher dividend paying stocks and I think this is a trend that’s going to continue throughout 2012.

Traditionally, the stock market universe has been divided between those investors seeking quarterly income and those searching for faster-growing companies in the hopes of greater capital gains. Now, with an economy and stock market that are so unsure of themselves, dividend paying stocks are the outperformers, as institutional investors and individuals seek more certain rates of return on their equity investments. This, in my view, is a very positive trend and it reflects a seemingly old-fashioned way of doing business in the stock market. You can bet that business is pretty good for more conservative money managers, whose focus is on income and preservation of capital; this is in contrast to overleveraged hedge funds that don’t have many bandwagons to jump onto.

What we know is that many large, dividend paying stocks with long tracks records of increasing dividend payments to shareholders are outperforming, both sectorally, and compared to the main stock market indices. While the S&P 500 Index has not quite doubled since the March 2009 low, stock in Caterpillar Inc. (NYSE/CAT) has more than quadrupled in value during the same time period—and this doesn’t include the company’s significant quarterly dividend payments to shareholders. This is just one example of many large-cap, dividend paying stocks that have actually performed like fast-growing technology companies.

The fundamental outlook for the U.S. stock market is actually improving, but it’s lacking in investor confidence. Would you bet that dividend paying stocks like Coca-Cola or Johnson & Johnson would reduce their dividends to shareholders going forward? I certainly wouldn’t, and institutional stock market investors aren’t doing so, especially now that equity investment risk is so high

With many large-cap companies buying back their own shares due to growing cash positions, I think it’s fair to conclude that this coming fourth quarter and next year we’ll see material increases to dividend payments. Accordingly, dividend paying stocks will continue to lead a stock market that’s stuck in the doldrums.

Stock market investors actually have quite a large selection of dividend paying stocks from which to choose. Many of these stocks are trading close to their 52-week highs, so in this market you kind of have to consider what Warren Buffett did recently with his new position in IBM Corporation (NYSE/IBM); you have to think about buying high. There really isn’t any other way to get the income. The bank certainly doesn’t pay very much.

The not-so-good news remains the debt crisis, and it’s important to remember that, even with new political leadership, austerity measures and solidarity in Europe, the debt crisis is actually getting worse. This is because so-called bailout packages for countries like Greece (which needs billions of euros just to meet its monthly payroll) are being financed with more debt. It’s kind of like paying the minimum monthly balance on your credit card with new credit from a freshly activated credit card. It’s a vicious cycle that’s unsustainable, and that’s why it really is a debt crisis, not just poor financial management.

This is why the stock market continues to waffle. We even had good news on retail sales and wholesale inflation, but the stock market yawned. Institutional investors realize that the debt crisis in Europe is real enough to collapse countries, currencies and financial markets alike. There is a bullish case to be made for the domestic stock market (based on valuations, earnings and visibility), but the euro debt crisis is such a cascading risk to the global economy that everything seems stuck behind. The consensus now is that the U.S. economy will show an uptick in growth in the fourth quarter this year, then slow in the first half of 2012.

This is why the outlook for the stock market isn’t very good, because the confidence just isn’t there for a lot of investors to want to bet on the future. Hence more interest in the commodity price cycle, especially precious metals and agriculture. With little expectations for capital gains and weak investor confidence due to the debt crisis, institutional investors are increasingly focusing on dividend yields, which, in today’s stock market, are looking pretty good.

The debt crisis in Europe is the single most important risk to the U.S. stock market. This is obvious. (See Investment Risk Going Up—It’s the Kind of Market Where Anything Could Happen.) But with euro countries’ spending being cut and debt financing a way of life in most Western economies, the prospects for meaningful economic growth seem lousy. And so, the expectation is for economic malaise for the medium term. It’s a pickle if you’ve got a lot of debt or you have a lot of money to invest. The debt crisis is very real and so are the weak expectations for the economy.

Making predictions in this kind of environment is foolish, but I think we’ll just get more of the same going into 2012. Economic growth will be lackluster and investment risk in financial markets will be high. The debt crisis in Europe will be with us throughout 2012 and the stock market is isn’t likely to do much accordingly.

There are always company-specific trades out there and a lot of third-quarter earnings were excellent. Valuations are also attractive, so this helps reduce the risk on new stock market positions. We had a good new entry point for gold investments and the trading action in the spot price has been less worried about the debt crisis. All in all, it remains a tough environment for stock market speculators, because there’s no tailwind out there. The best the stock market can hope for over the near term is to remain above its correction trading range. This in itself would be an accomplishment.

The sovereign debt crisis represents the single greatest threat to your pocketbook, not the anemic U.S. economy. The reason for this isn’t the big swings in the Dow Jones Industrial Average or today’s weak investor sentiment—it’s all about the currency risk; specifically the euro currency, which is the world’s second largest reserve currency (see Investment Advice Matters, But Investment Risk’s Tops in My Book).

If a primary currency like the euro were to experience member country defaults, there would be turmoil in the U.S. dollar, then commodities, and then the U.S. stock market. Currency values can change dramatically over time, but it’s the big, short-term shocks that create depressions and long bear markets.

We are seeing political progress on the debt crisis in Europe, but it’s slow and mostly reactionary. It seems like that’s the way things are, no matter where you live in the world—politicians react to a debt crisis, rather than enact the measures necessary to prevent one in the first place. Case in point, the subprime mortgage debacle and Wall Street bailout. The euro currency has been stronger in recent days, but no trader expects any lasting strength. There’s just too much uncertainty out there.

Spain is the eurozone’s fourth largest economy and is not nearly as wealthy as the first three. The former has stopped growing and is about to hold a round of federal elections. There is a real reckoning going on in the euro continent and it doesn’t have to end badly. The debt crisis has forced new austerity measures among many euro countries and that’s good. But, what’s required is the fulfillment of those measures (several euro countries are known for not following through on enacted legislation) and the political will to keep things together. The debt crisis has forced the euro currency downward, but there is a decent chance that all the political reckoning that’s now taking place will make the European Union stronger over the long term.

The downside to your pocketbook is in the short term. With virtually zero growth in the four largest euro countries, political upheaval and budget austerity measures, the near-term result will be no GDP growth. This is the reality we now face for the next several years.

Nowadays, of course, financial markets trade on global news and sentiments and, because the American economy has been on the rails, institutional investors are now trading off of economic news from the debt crisis in Europe and China to a lesser extent.

Similar to the subprime mortgage crisis, the debt crisis in Europe is all about a lack of leadership from politicians. The party’s been going on for so long that no policymaker has had the strength to challenge the status quo with a real double-take on how poorly things have being run. Stock market risk in the U.S. is very high at this time because of the failure of European leaders to deal with a sovereign debt crisis that involves many of their member economies. Add in the fact that only a few euro member countries can be considered “wealthy” and an easygoing attitude towards entrepreneurship, worker productivity, and lifestyle; it’s not that hard to envision many of these countries spending beyond their means. Especially in the case of Greece, where not everyone pays their income taxes. (See The Cycle of Debt Must Be Broken for the Whole System to Correct Itself.)

So it’s a real mess and it’s fostering weak investor sentiment. The U.S. stock market has been very well valued for several quarters now and third-quarter earnings have been nothing short of great. We’ve seen real progress among industry laggards like the technology sector, and most visibility is solid. But, domestic investors have been beaten down hard since the subprime mortgage meltdown and the stock market’s outlook has been so reduced that all professional traders act on these days are debt crisis rumors and risks. It’s a frustrating environment for investors, businesses seeking capital, and workers alike.

I feel like the U.S. stock market is being held hostage by the sovereign debt crisis and the lack of decisive, unified leadership to deal with the problem. And here’s the pickle: I can’t see how domestic stock market investors will be able to move forward without Europe’s action on the matter.

It’s not a good situation to have your own domestic investor sentiment strongly influenced by the reality in an economy that’s far away. Europeans that I talk to want the situation dealt with so they can get back to concentrating on their food and lifestyle. Many don’t even think about the stock market at all.

The U.S. stock market is at the point now where it could be making real gains based on its own solid corporate fundamentals. I don’t know where Europe’s debt crisis is going to take us, but the economies in Europe are stalled, so they certainly can’t grow their way out of this problem. This, I fear, means that things are going to get even tighter in the future.

Gold stocks and investing in gold are the same thing as buying a future stream of earnings from a regular business, except the underlying asset can fluctuate significantly in value, thereby making or breaking the business model very quickly. Gold stocks have a lot of strength these days and it’s a trend that’s been building for a number of years. Stock market investors were recently presented with an opportune entry point for new positions in gold stocks, as the sector was much in need of a correction (see What the Investor Sentiment Shift Means to the Commodity Trade). While investing in gold might be just a sideline strategy for most investors, there is a lot of technical strength in gold prices today.

Investing in gold makes a lot of sense in the current environment, even as spot gold prices are near record highs. If the euro currency comes apart, gold will rally. If the euro doesn’t come apart and the sovereign debt issue improves, gold will rally. It can do so on a weaker dollar; it can do so based on rising core inflation. There are just so many reasons why the price of gold can stay strong and rally even further as we move into next year.

If you have experience investing in gold, then you know that gold stocks move commensurately with the underlying price of the commodity. This is unavoidable, no matter what the trade (inverse ETFs or derivatives excluded, obviously). Gold stocks are based on the underlying commodity price and, with this reality, price momentum is very meaningful. If you thought the trend was your friend in the stock market, history shows us that it’s even more pronounced in commodities. That’s the attractive part about investing in gold at this time; there’s very little price momentum anywhere else in the stock market.

Of course, investing in gold today isn’t without its risks. A good trading opportunity just came and went when the spot price corrected. But this is a stock market that remains very unsure of itself and I’d rather be investing in gold near price highs than trying to buy low and sell high in other sectors. Gold stocks are the place to be for the next several years. As long as there is too much debt and rising inflation (due to huge increases in sovereign money supplies), gold stocks should pay.

The great reckoning that’s going on is all about debt and the ability of entities, be they individuals or countries, to live within their financial means. The stock market hasn’t traditionally spent much time worrying about sovereign debt for the simple reason that the limits to all this debt haven’t reached the breaking point up until only recently. Precipitated by the subprime mortgage meltdown, large financial institutions and entire countries are now being forced to deal with their lack of prudence. The end result is a stock market that’s completely unsure of the future.

As I’ve been writing, it’s my firm belief that, if the sovereign debt issue in Europe did not exist, the U.S. stock market would be quite a bit higher than its current level. And not only this; but there would be a lot more hope towards the future. The U.S. economy is by no means in full recovery, but there are positive signs out there. Eventually, a new business cycle will take hold and investors will be buyers in the stock market. I’m currently in Europe and every financial professional I ask says the same thing: Greece shouldn’t have been allowed into the euro currency, because they weren’t strong enough financially. In fact, many people I’m speaking with say that it was kind of a fraud, with Greece’s sovereign debt problem revealed to be much worse than originally presented at time of membership in the monetary union. Regardless, the feeling I’m getting from the people I’m talking with is that they want the European sovereign debt problem fixed as soon as we do. Everybody wants to move forward now.

I think it’s fair to say that the stock market is holding up because of strong domestic earnings. I have a gut feeling that, in spite what comes of Europe’s sovereign debt problem, U.S. stock market investors are soon going to attach less significance to the issue. We can’t keep going on like this.

Currently, investors haven’t been willing to pay as much for the strong corporate earnings that we keep getting quarter after quarter (see An Earnings-based Stock Market Rally Soon—Is It Really Possible?). The stock market’s been trading on Europe’s sovereign debt fears, largely because of a lack of confidence after the subprime mortgage crisis. But I think this trend will soon change, because, eventually, you can’t argue with the numbers.

The stock market’s best asset for individual investors is higher-dividend-paying stocks. The main stock market averages aren’t likely to do anything spectacular over the next several quarters, and that’s why dividend income is a stock market investor’s new best friend.

The recently released Markit Eurozone Manufacturing Purchasing Managers Index (PMI) for October has been waning on the euro currency. This manufacturing index measures changes in the business activity of thousands of eurozone manufacturers. The October index fell to 47.1, revised downward from a preliminary reading of 47.3 and down from 48.5 in September. Similar to U.S. manufacturing data, a reading below 50 indicates contracting manufacturing activity. This is now the third consecutive month that this eurozone manufacturing PMI has been below 50.

So, with the economic numbers pretty grim in Europe, the sovereign debt crisis is like the icing on the cake in terms of bad news. With the expectation for recession in Europe, it’s a bear market in European stocks and the prospects for the euro currency seem weak.

The problem with the current debt crisis is that the European banking industry has heavy exposure to individual country bonds and any default will put them in jeopardy. If the debt crisis were to get out of control, then there would be heavy pressure on the euro currency and many foresee an actual breakup of the world’s second largest reserve currency.

Predicting what will happen with the debt crisis and euro currency is virtually impossible. What the stock market wants to see is concrete, unified policy action from European leaders, and that’s been tough to get. Well-known investors like George Soros have given a decent probability that the euro currency will fail, but there seems to be a determined policy in Europe for these countries to stick together monetarily. One thing I know is that the debt crisis represents the single greatest risk to domestic stock market investors and, at the institutional level, Wall Street is getting fed up with the lack of solutions. As an individual market participant, I’m getting fed up, too.

Since the beginning of October, however, there’s been a marked turnaround in Chinese stocks, especially those listed on Chinese stock exchanges. The Hang Seng Index, which is the main stock market index in Hong Kong, dropped to a low of around 16,000 early in October, then smartly reversed to its current level of around 19,500. By any account, this is an impressive turnaround, and the strength in Chinese stocks is due to expectations for monetary easing in China.

Right now, the U.S. stock market needs all the help it can get and any positive news on the Chinese economy would be very helpful. Smaller Chinese stocks trading on American stock exchanges typically take quite a while to report their quarterly earnings and many beaten-down positions will be reporting throughout November. There is an opportunity in this stock market for some bottom feeding in Chinese equities. Stock market conditions seemingly can’t get much worse for this group and there is good value out there.

Of course, a number of previously listed Chinese stocks were outright frauds in terms of their operations and financial results. Many of these companies listed by acquiring shell companies and renaming them. It’s an easier way for a company to get a U.S. stock market listing. In this market, I’d only consider the well-known Chinese stocks that have strong followings from the investment community and I’d focus on value.

Right now, I think it’s fair to conclude that stock market speculators would rather own gold over Chinese stocks. The resource trade is holding up despite all the risks out there and, while some Chinese stocks offer very low price-to-earnings ratios, the confidence issue isn’t going away anytime soon.

Chinese stocks were some fantastic wealth creators. Then they were fantastic wealth destroyers (unless you were short). It’s fair to say that Chinese stocks operate in a kind of Wild West environment, which lacks oversight and reporting regulations. The stock market knows that there are great growth stories out there; but, in today’s environment, all investors seem to want is safety and stability (see Growth & Momentum in a Market Like This? You Bet!). I don’t blame investors, considering all that’s transpired. We’re in an environment of great unknowns and this uncertainty is holding the Main Street economy back. Are we any closer to more certainty in the stock market? Right now, I’d have to say no.

The best news for the spot price of gold and individual gold stocks isn’t the European debt crisis; it’s the fact that central banks are buying gold bars again. For years, the central banks of mature economies have been selling off their gold holdings for the simple reason that the assets didn’t generate any rate of return while sitting in the vaults. Now that there’s so much uncertainty in the marketplace and U.S. dollar leadership has lessened, many countries are quietly creating new stockpiles.

We’ve talked about a number of growing gold producers in this column (see Everything Gold Is Turning Into Some Serious Green). I watch dozens of gold stocks at once, and I’d stick with those trading near their 52-week highs. I’d rather try to buy gold stocks high, with the hope of selling at a higher price later, than try to buy low. If a gold stock isn’t doing well now, then it’s less likely to do so later. This isn’t the case for the rest of the stock market, but the gold sector in particular.

The stock market has already rewarded many gold investments, but the spot price of the commodity has so much upside potential going forward that the business model for established producers is very good. There is a lot of risk in the global economy and core inflation rates in mature economies are going up. If the stock market does nothing over the next six months, it’s my prediction that gold stocks will be some of the best performers, following the spot price as it slowly ticks higher.

For speculators in the sector, you want to choose from gold stocks that offer an attractive package—an established miner with growing production, ongoing exploration, declining cash costs, etc. With so much uncertainty in the world and the stock market, exposure to some gold investments is a must in this market. There isn’t any rush to consider much else.

The stock market did a great job breaking out of its correction trading range. The question is, can the breakout hold? If Greece would get its act together, then this is a stock market that wants to go higher.

Everyone knows that corporate earnings tend to be managed by companies and Wall Street analysts. But corporate earnings have been decidedly strong this quarter and all throughout the year. I’m certain the stock market would be a lot higher today if it wasn’t for Europe’s sovereign debt crisis.

We’ve seen very solid corporate earnings from the technology sector, basic materials, healthcare, and industrial goods. Stock market investors revised their corporate earnings expectations lower going into 2012 and this is setting up the stock market for a new advance, providing that the debt crisis or some other shock doesn’t take place. It’s a tricky time to be a stock market investor—with the age of austerity comes a great unknown. There will be growth in the future, but will it be like it was before? It’s tough to imagine Main Street corporate earnings taking off without a new up cycle in the real estate market.

The current stock market is well set up for a decent rally. Valuations are reasonable, visibility for corporate earnings is mostly solid and there is lots of cash sitting on the sidelines. The key going forward will be renewed certainty on the European debt crisis and renewed spending from consumers. With confidence comes hope and with new hope for the future comes renewed consumer spending.

One thing that’s seems quite unlikely, however, is a speedy return to normal economic growth rates. We’re still coming off a major period of debt-fueled excess and both Main Street and Wall Street (banks in particular) are trying to establish a new normal for operations (see All Global Investment Risks Point to a Steady Dollar & Mediocrity in Stocks & Metals). I have to say that, if it weren’t for emerging markets, interest rates being low, and a weaker U.S. dollar, corporate earnings would not be so robust. Policy-wise, the Federal Reserve is making progress domestically. It’s Europe that’s holding things back.

The stock market was due for a little rest after such a strong breakout, but the Greek news was a real surprise. The expectation for the fourth quarter is for another round of solid corporate earnings and, accordingly, the breakout should hold. Any return below 1,200 on the S&P 500 Index would not be good technically. The stock market is muddling through the tough times. It’s time now for Greece to get its act together.

The commodity price cycle and gold stocks have been experiencing the same price correction as the stock market. But, any reasonable economic analysis suggests that, with so much debt in the world and governments trying to grow their economies with reduced interest rates and printing money, the next major reckoning is about to be unleashed. We’re already seeing core inflation rates going up around the world and, as economies recover, there will be growing scarcity in a basket of raw materials. This is why gold stocks are poised for another major upward price trend—the fundamentals for the spot price of gold are actually getting better (see Precious Metals Sector Deal-making Padding Investor Wallets).

You might not think about it, but the stock market is still in a long-term bear market. I don’t care what the definition of a bear market is; the stock market is still below its value in early 2000—that to me is a bear market. But what have come alive during the last 11 years are commodities and specifically the prices of gold and gold stocks. With all the risks around the world, including the European debt crisis, I don’t see the price of gold as being expensive at all. In fact, it isn’t as adjusted for inflation.

This is why I’m so bullish on precious metals, gold stocks in particular, and agriculture. All the debt and increasing money supplies will come back to haunt the global economy in the form of inflation. What economic growth we can generate now might just evaporate under the auspices of central banks trying to contain the very inflation that they created. That’s why gold stocks are sitting pretty. They already have the cash, the fundamentals and the growing demand for their commodity. It’s a new upward price cycle that’s about to begin.

Gold stocks are like any other stock market sector—they trade as a group. Most investors tend to associate their gold investments apart from their main stock market portfolio. I can’t predict where the spot price of gold is going to go, but all the global policy action that’s been going on since the subprime mortgage meltdown leads me believe that gold stocks will be the stock market’s major outperforming sector over the next several years.

Stock market earnings continue to pour in and, for the most part, they are coming in as expected, with a slight bias to upward surprises. The big story is obviously the progress on the debt crisis and, because of this, a lot of stock market investors are being distracted from the good news. All I can say is that, with a very slow economic backdrop, large-cap corporate earnings are impressive and I think it’s a theme that’s going to stick for the next several quarters. With the stock market breaking out of its correction trading range, the likelihood of more near-term upside is strong.

It’s up to the Europeans to fix their debt crisis and that’s that. I don’t want to sideline the issue, as we all know stock market investment risk has been a lot higher because of their fiscal problems. But, it is third-quarter earnings season and I want domestic stock market investors not to forget just how well some companies are doing right now. It might not seem like good times on Main Street, but, at the corporate level, things are looking good—debt crisis or not.

Consider the outstanding performance being produced by pharmaceutical powerhouse Bristol-Myers Squibb Company (NYSE/BMY). Stock market investors in this high-dividend-paying stock are being well rewarded with solid financial results that beat the Street and a stock price that just hit a new 52-week high with a four-percent dividend yield. All this and a stock market price that continues to be reasonably valued.

Bristol-Myers sells the blockbuster blood thinner known as “Plavix,” along with a number of other big name successes. The company’s third-quarter net income came to $969 million, or $0.56 per share, up from $949 million, or $0.55 per share, in the same quarter last year. Excluding an after-tax charge of $75.0 million for one-time items, adjusted net income was $1.0 billion, or $0.61 per share, topping Street consensus of $0.58 per share on an 11% gain in revenues to $5.35 billion.

Stock market owners of Bristol-Myers have been solidly rewarded over the last two years and it’s not only because of the capital gain. Bristol-Myers has averaged a five-percent dividend yield, which is quite a lot when you think about it. A five-percent dividend yield adds up pretty fast, especially in a stock market that’s been anything but consistent. The debt crisis might have held the stock market back over the last several quarters, but not in BMY shares.

Moving to the agriculture sector, fertilizer giant Potash Corporation of Saskatchewan Inc. (NYSE/POT), which is an important stock market benchmark in this burgeoning sector, reported its second highest third-quarter earnings ever. According to the company, “Although customers prudently managed inventory risk, the undeniable need for potash, phosphate and nitrogen ensured our products moved through the system to reach farmers around the world. Our third-quarter performance reflected the unrelenting pressure on global food production…”

The company’s stock market performance has mimicked the broader market this year, but technically, Potash looks very healthy, with a long-term upward trend seemingly intact. The company reported third-quarter earnings of $826 million, representing an impressive gain of 147% over last year. Revenues grew to $2.32 billion in the latest quarter, up from $1.58 billion last year, and management said it is on track to grow its earnings by around 85% for all of 2011.

The stock market has certainly been in a bad mood lately and it’s no wonder with the European debt crisis and declining expectations sapping any positive investor sentiment. Of course, you can’t say that the debt crisis is now over and you can’t say that the stock market won’t be subject to major shocks in the future; but, over the near term, I’ll take the good news over the bad. This is a stock market that’s poised for further short-term gains.

The biggest worry among institutional stock market investors and the European debt crisis isn’t a Greek default. It’s the cascading default risk to the big European banks and the resulting instability this would create with the euro currency. The debt crisis has no doubt created a permanent investment risk for domestic stock market investors. I’m just glad that European policymakers figured out that they needed to act boldly on the debt crisis issue. It just goes to show you that policymakers are always behind the action in capital markets.