The S&P 500 Index is inching its way back up to the 1,300 level, and this makes me feel a whole lot better about the health of the equity market. Recent trading action in both stocks and commodities suggests to me that we did in fact experience a correction, albeit one without a catalyst. The sovereign debt issue in Europe certainly weighed on sentiment and domestic economic data haven’t been strong. But, I do get the feeling that the tide is changing and institutional investors want to be buyers of stocks.
As I’ve written, second-quarter earnings season can’t come soon enough. Investors are desperate to read what companies are saying about their businesses. The marketplace wants some reassurance that earnings will be there and, more importantly, it wants some direction on the future, because it can’t figure one with the current economic data.
The second and third quarters of a year aren’t typically good ones for the stock market and I think this well-known trend will play itself out again this year. We might even get range-bound trading for the rest of the year, which is why large investors have been buying yield. The argument is that they might as well get some return on their investment.
The Dow Jones Transportation Average (one of the most important benchmark indices for investors to follow) performed a bit of a miracle recently. The index broke the 5,400 level pretty hard at the beginning of the month, dropping almost to the 5,000 mark. Very recently, this index climbed back to over 5,300. At the end of April, this index hit an all-time high, which was very close to the level the index was trading at in 2007 and 2008, before the financial crisis began.
Unless second-quarter earnings are well below expectations and there isn’t a major shock to the financial system (like a country debt default), I think this market is setting itself up to go higher. It may not happen until September or later, but we could experience a solid year-end rally in stocks based on very reasonable valuations, solid earnings growth, and decent prospects for the future. The economy still has a long way to go before it fully corrects itself. What the Federal Reserve does in terms of stimulus is rather irrelevant going forward. The business cycle has to be left to play itself out and the economy has to get solid footing for growth on its own. We’re getting there, and the best barometer of all is the Dow Jones Transportation Average. Right now, Norfolk Southern Corporation (NYSE/NSC) and Union Pacific Corporation (NYSE/UNP) are trading right around their 52-week highs. This is all the confirmation I need for an S&P 500 Index at 1,500 by the end of the year.