Lombardi: Stock Market Commentary & Forecasts, Financial & Economic Analysis Since 1986

Are We in a Sucker’s Rally?

Wednesday, February 1st, 2012
By for Profit Confidential

Another benchmark stock reported good corporate visibility for 2012 and it’s another small but positive sign of economic recovery, as well as the health of corporate America. United Parcel Service, Inc. (NYSE/UPS) reported 2011 fourth-quarter revenues that grew six percent to $14.2 billion. U.S. revenues grew seven percent to $8.7 billion during the quarter and adjusted earnings grew 21% to $1.28 per diluted share. The company reported that it expects “modest” revenue growth this year, but corporate earnings should improve at a percentage rate in the low double digits. To me, this outlook is impressive.

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.

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Mitchell Clark - Equity Markets Specialist, Financial AdvisorMitchell Clark, B. Comm. is a Senior Editor at Lombardi Financial specializing in large- and micro-cap stocks. He’s the editor of a variety of popular Lombardi Financial newsletters, such as Income for Life and Micro-Cap Reporter. Mitchell, who has been with Lombardi Financial for 17 years, won the Jack Madden Prize in economic history and is a long-time student of equity markets. Prior to joining Lombardi, Mitchell was as a stock broker for a large investment bank. Add Mitchell Clark to your Google+ circles