Bonds that a government issues in a foreign currency are referred to as “sovereign debt.” Sovereign debt does not come with a specific charge on a government’s assets. It is simply a promise to pay. In reality, if a government does not pay its sovereign debt upon maturity, the loss of creditability is the biggest threat to the country—it will have a difficult time issuing sovereign debt again.

In a consumer-driven economy, what retailers say about their businesses is very important. For the most part, the retail sector has been saying that business conditions are getting better. A lot of retail stocks performed very well up until the recent stock market correction and valuations are reasonable. I’ve been writing about an underlying strength in the stock market and the U.S. economy and you can see it right now in the retail sector.

The strong first-quarter financial results of Wal-Mart Stores, Inc. (NYSE/WMT) beat consensus and the company expects strong profit growth in the current quarter. A lot of other brand-name companies in the retail sector reported very good numbers for the first quarter and many retail stocks are trading close to record highs on the stock market. Right now, with all the available news and lower oil prices, I’d say that second-quarter earnings season is shaping up to be surprisingly strong.

So, we have a stock market that’s in correction; however, economic news is showing mixed, but generally improving data. Lower oil prices stimulate consumers to spend and they lower the cost of doing business in the industrial sector. While speculators might bet that lower oil prices are a put option on the global economy, the spot price action directly affects the retail sector and that’s good for the economy.

As I keep saying, if we didn’t have the sovereign debt crisis in Europe, I believe the stock market would be a lot higher than it is currently. Corporate earnings growth may not be robust, but it isn’t flat either. The retail sector has been and should continue to be strong through to the end of this year. (See Wall Street Beats Main Street Again.) As well, a lot of industrial companies are expecting a solid bottom half to 2012. And the outlook for the consumer goods sector is also strong, with companies like Colgate-Palmolive Company (NYSE/CL) and Kimberly-Clark Corporation (NYSE/KMB) trading at all-time record price highs on the stock market.

The structural problems in the U.S. economy and the eurozone are almost entirely related to sovereign debt. This is a fundamental problem that needs to be addressed by policymakers. But consumers are doing their part and, as stock market investors, we can see this in the numbers. I fully expect the retail sector to keep outperforming over the coming quarters and the strength in this industry should trickle down to other sectors for a better-than-expected second-quarter earnings season. That’s my current view right now.

The current stock market correction has some legs, so be prepared for more downside. We’ve got gold below $1,600 an ounce and oil solidly below $100.00 a barrel—this is a broad-based market correction in investable assets and it will likely linger for a while.

The stock market began to roll over naturally after the majority of first-quarter earnings were reported. We were due for a market correction just based on the market’s strong performance from the beginning of the year. Then, the most recent catalyst was the political uncertainty in the eurozone and the continuing worries regarding European sovereign debt. The timing could not have been more perfect. Going forward, I wouldn’t be surprised at all if stock market trading action is difficult right until the end of the summer. Then, it’s election fever. The old adage, “Sell in May and go away,” looks like a winner this year.

In terms of investment strategy, now isn’t the time to be a buyer. I think stock market investors should wait for the current market correction to play itself out, while watching for good corporate news and dividend increases. The spot price of gold is also in correction mode and could be soft for the next couple of quarters, perhaps even into next year. For stock market speculators, I continue, however, to like mining stocks. For the majority of an equity portfolio, higher dividend paying stocks are the only way to go in a slow growth environment.

Investor sentiment isn’t all that bad at this time. The stock market needed a market correction and is gyrating on Europe, but the domestic outlook is still decent and stocks are not expensive. Some industries are doing much better than others, but this is the nature of economic recovery. It takes a lot of time for the system to balance itself out after the mortgage debt-induced financial crisis.

So, if you’re a stock market investor, you need a lot of patience. Most U.S. corporations said in their first-quarter financial reports that they expect business to get better in the bottom half of the year. The fundamentals, in terms of valuations and corporate earnings, are actually pretty decent for the stock market. But, the marketplace is now in fear mode and the biggest problem is all the uncertainty. We’ll see how long this market correction lasts. Anything is possible these days.

I would add that the gift of a material price correction is the opportunity to invest in good companies at a more attractive price. Equally important is the falling price for oil, which has an almost immediate impact on disposable income and corporate earnings. The financial world isn’t coming to an end (at least not quite yet); it’s only going through a well-deserved market correction. There is an underlying strength to the stock market and that’s because of valuations. (See The Best Performing Index Over the Last 12 Years.) Share prices could be soft for the next several months, so retail investors will likely keep to the sidelines. I expect institutional investors to keep buying higher dividend paying stocks throughout the year. I also expect increased dividend announcements right into 2013.

This is the correction we’ve been expecting and it’s affecting stocks as well as commodities. The stock market has been due for a correction after a solid first-quarter earnings season and, because share prices moved so strongly since the beginning of the year. It doesn’t really matter what the catalyst is for the correction; it is well-deserved and a healthy development in my view.

I think the S&P 500 Index is vulnerable now to the 1,300 level and, if it gets there, this would be a meaningful correction and a good buying opportunity for higher dividend paying, large-cap companies. Generally speaking, I think we’re in a time now where the stock market will be more apt to reward income over growth. Large-cap, dividend paying stocks have been leading the stock market since last October and I think this trend will continue right into 2013.

Along with large-cap stocks, both smaller companies and commodities are also experiencing a pullback. Growth concerns in the global economy are real and whether it’s related to price inflation in China or sovereign debt problems in Europe, the new normal is slower economic growth rates, especially among mature economies.

I don’t see any reason why the U.S. stock market can’t reaccelerate this year, especially as we are likely to see sporadic improvement in the economic news. And, while the outlook for corporate earnings isn’t robust, it’s still solid and stock market valuations are reasonable. Investment risk remains high for all equities, but it’s been like this since the financial crisis.

I think that big corporations are keeping earnings expectations purposefully low, in order to outperform come earnings season. (See Earnings Reflect Expectations—the Stock Market Is Fairly Valued.) It’s a way of providing shareholders with “good news” in a slow growth environment. One thing we are getting though is increased dividends and this is great news if you like dividends income with the potential for capital gains. Intel Corporation (NASDAQ/INTC) was the latest brand-name company to up its dividends payment to shareholders and, with so much cash building up on corporate balance sheets, increasing dividends news should continue throughout the year.

As I’ve said, this stock market correction is healthy and well-deserved. The stock market is fairly valued and this gives us a lot of breathing room for a pullback. If I were an equity investor looking for new positions this year, I’d wait until the correction plays itself out and I’d be watching my favorite dividend paying stocks for a good entry point. I still like gold investments for speculators; but, to me, dividends are king in this kind of market.

Bank stocks have been a hit in the market sell-off over the past few years. Many bank stocks are still selling at a discount to book value, even after this recent six-month increase in stock prices. Although many bank stocks have risen lately, one has not and continues in its own market sell-off: Banco Santander, S.A. (NYSE/STD). Banco Santander remains near its 52-week low and near the lows of the market sell-off in late 2008 early 2009.

While Banco Santander may appear cheap to some people, I would urge caution before putting money into this troubled firm. As the largest bank in Spain, Banco Santander faces a huge amount of headwinds. Current earnings showed a decline to €1.6 billion from €2.1 billion in the previous year for the first quarter. Part of the loss was €3.0 billion set aside to cover bad loans in Spain and other periphery countries. At the end of March, Banco Santander had nonperforming loans valued at €33.0 billion, or four percent of the total loan portfolio.

While four percent might seem large for bank stocks, it might not be enough, considering that Banco Santander has a huge amount of business in the Spanish real estate market, where Spain’s average net nonperforming loan ratio for other bank stocks is close to 10%.

There are some portions of Banco Santander that are doing very well, mainly its Latin American divisions. Unfortunately for investors in Banco Santander, the firm has already started selling the best portions off to try to raise more capital. The last thing you want in bank stocks during a market sell-off is for them to get rid of their best assets. You are left holding an empty shell with poor properties and a bleak future.

Billions more need to be raised and the Spanish real estate market sell-off continues. I worry about how Banco Santander is going to raise the funds. Several European bank stocks have done share issues, which cost shareholders dearly—some by issuing shares at such a drastic price that the bank stocks shares declined over 40%.

Why should American investors care? As we’ve learned with the downfall of Lehman Brothers, large bank stocks are intertwined worldwide. Banco Santander, with 15,000 branches, is the 19th largest bank worldwide when measured by assets. The ripple effects of one of these bank stocks going under would be truly damaging to the worldwide financial system. One thing that does worry me is a similarity that Banco Santander has with Lehman Brothers, in that a large part of its banking relies on wholesale debt and external funding to raise money for daily operations, as opposed to deposits. Meaning, if the wholesale funding market freezes like it did in 2008, this bank could be in serious trouble, causing an even bigger market sell-off.

I also don’t think the dividend yield will be maintained, so investors who buy now may be in for a shock if the dividends end up being cut. And, with the real estate bubble in Spain continuing to deflate in a market sell-off, considering Banco Santander is one of the largest lenders to construction firms and real estate development in Spain, the losses might be massive.

Banco Santander also has a total exposure to sovereign debt of approximately $77.0 billion, with approximately $3.0 billion in Portuguese debt and over $63.0 billion in Spanish sovereign debt. With such a large exposure to Spanish debt, any default or revision to the debt by the Spanish government could shut the entire firm down and wipe out shareholders’ equity completely in a massive market sell-off.

This, of course, means that Banco Santander is one of the bank stocks that “can’t fail,” with the Spanish government and the European Central Bank most likely willing to step in to support one of the biggest bank stocks in Europe. That’s a big bet that I’m not willing to make. If the firm does issue shares in its Latin American divisions like Chile or Mexico, I might be interested in those separate areas, as long as they have no connection to the European division.

I think we’re going to get more of the same over the coming quarters—choppy economic news and choppy stock market trading. The key I think is to keep listening to what corporations say about their businesses. Corporate earnings continue to pour in and it’s very clear that not all businesses or industries are performing the same. The lack of broad-based, cohesive economic growth is the result of a global economy that’s still trying to balance itself out after the subprime mortgage-induced financial crisis. That bubble and its collapse continue to be far-reaching, for the world and the stock market.

There are two very significant investment risks out there and it’s my feeling that they will continue to create major headwinds for the stock market, this year and next. There is significant geopolitical risk with Iran and North Korea. These countries’ actions are naturally unpredictable. More predictable is the sovereign debt crisis in Europe and the zero economic growth it has created. Germany is the economic engine of Europe and that country is likely to outperform, but with sovereign debt in many of those countries running well over 100% of gross domestic product (GDP), the future to me seems inevitable. (See What We Can’t Forget About in the Stock Market Today.) Regardless of what happens to these countries or the euro currency, the end game is the same—little to no economic growth.

So, here is a scenario that I think has potential to transpire over the next couple of years. Europe’s sovereign debt problems will get worse, as politicians borrow more money to bail out member countries. Austerity packages will become more severe in order to aid on the government spending side and, therefore, the eurozone will be stuck with a long period of stagnating economic growth. While economic growth in the U.S. is on the cusp of accelerating, zero economic growth in Europe and declining rates of economic growth in the BRIC countries will reduce the earnings power of U.S. large-cap companies. Accordingly, it’s stagnation for the stock market as well. And this scenario doesn’t include the potential for another war.

This fundamental macro outlook is why I think the stock market is generally in the process of topping out. It may happen this year or next, but I just can’t see how corporate earnings are going to be able to accelerate in a world of very slow economic growth. That’s why I’m advocating a very conservative investment stance for stock market portfolios, with some exposure to commodities, as the Federal Reserve continues to increase the money supply.

The one thing the stock market has going for it today is that it’s not overvalued. The stock market isn’t in a bubble given the current earnings outlook. This reduces the chances of a big hit. Still, my gut tells me it’s time to become extra cautious, even though we should get more good news for a while.