Everyone knows that the stock market likes to bet on the future. It’s possible we’ll get a very good second-quarter earnings season without much change in the main stock market indices. This is a market that’s just plain unsure of itself.
Sentiment would improve if the sovereign debt issue were more under control. This is an issue that must be addressed, because global capital markets will no longer let it ride. Accordingly, we could be in for a slow growth period for quite a few years. Institutional investors have this view and it certainly is tempering the desire to buy stocks.
The key index that I follow is the Dow Jones Transportation Average. This index made a solid recovery after tempting the 5,000 mark. It’s trading right around an all-time high and has shown amazing consistency in its performance since the market low in early 2009. We’re about to get the numbers from the big railroad companies and this will be an important indicator for investors. Railroad stocks were some of the best-performing stocks over the last year. Since May, they’ve mostly been in consolidation mode, as sentiment in the broader market weakened. In previous earnings reports, the railroad companies were quite positive about load factors, freight pricing and future demand. If these stocks are to accelerate from current levels, they will have to beat current guidance going into 2012.
We’ve seen quite a bit of yield buying lately, as investors have been migrating towards higher-dividend-paying stocks in order to generate some more consistent returns. This is a trend that is likely to stay with us due to the fact that the economy isn’t generating the kind of growth that everyone wants. With this in mind, the Dow Jones Industrial Average (Dow) should keep outperforming.
Currently, the Dow is trading right around the same level it was in early 2007. Its all-time high was set towards the end of the same year, then the index was sliced in half due to the mortgage meltdown. When I look at the Dow’s charts over different time periods, I’m struck with the expectation of total mediocrity going forward. Somehow, the index looks like it’s trying to balance itself out after only a few periods of major wealth creation. From 1995 to 2000, the Dow basically appreciated to 12,000 from the 4,000 level. That’s an incredible gain for large-cap companies in such a short period of time. Then, the Dow just drifted for the next seven years before breaking past the 12,000 level again in 2007.
Ignoring the spectacular ups and downs, the Dow is currently trading at the same level it was 12 years ago. Without dividends, an investor in that index would have lost money due to the rate of inflation. The lesson I suppose is that stock market indices are only a guide and they garner far too much attention. Lots of large-cap stocks beat the Dow’s performance over the last 12 years. In the end, it’s individual stock selection that counts. A major stock market index is more an indicator of investor sentiment than anything else.