Blue-chips: Watch & Wait for the Best Ones to Correct Further

The daily ebb and flow of the stock market really illustrates the degree to which investors buy and sell based on their emotions. Europe says there’s an idea to work more closely on the sovereign debt crisis; the stock market goes up. Europe doesn’t really execute on said idea; the stock market goes down. Granted, it’s tough for an equity investor to make solid choices after all that’s transpired since mid-2008. In the end, the rollercoaster of uncertainty in today’s stock market (blue-chips or not) only serves to lengthen time horizons for a reasonable return on investment.

My view on stock market investing in this kind of environment is to stick with conservative, blue-chip companies that pay dividends. I would be following specific blue-chip stocks in this market; those with long track records of successful wealth creation. But speculating for capital gains is a whole other story. In the late 1990s, it was easy to make money from technology stocks. Now it’s a completely different ballgame. (See Stock Market: The Good News for 2012) Blue-chips might not be the fastest growing companies; but, then again, there’s not a lot of growth out there to be had.

There’s always room in an equity portfolio for some high flyers, but the days of five percent to six percent in gross domestic product (GDP) growth are gone. In the age of austerity, which has been forced upon us due to high levels of sovereign debt, economic growth is incremental, basically moving with the population.

I’ve written before that, if I were a new investor, I would be a buyer of blue-chip stock market leaders that are down from their highs. Blue-chips that come to mind are International Business Machines Corporation (NYSE/IBM), Colgate-Palmolive Company (NYSE/CL), Union Pacific Corporation (NYSE/UNP), PepsiCo, Inc. (NYSE/PEP) and The Southern Company (NYSE/SO), to name a few. Companies like these are blue-chip, brand-name market leaders with solid track records of dividend increases to shareholders. Good long-term wealth creators that have proven they can ride out the business cycle, while still generating income for investors.

I honestly believe that stock market investors are in for more difficult times over the next several years. The probability of a U.S. recession is increasing and corporate earnings growth is coming down. I look at the large-cap equity universe as being in the process of topping out; resetting itself after years of easy money (artificially low interest rates) and fiscal imprudence. All you have to do is pull up a 40-year chart on the S&P 500 Index and you can see the excess, the price correction, and the likely trend over the near term. According to the long-term chart, I believe the stock market, as measured by the S&P 500 Index, is vulnerable to the 800 level in the next U.S. recession.

Again, I expect the next few years are going to be difficult for the stock market. As a long-term investor, I’d be a buyer of select blue-chip stocks as they correct. I wouldn’t seek out companies that don’t pay dividends. While 2012 may end positively for the stock market, 2013 and 2014 are likely to see continued problems as the global economy tries to balance itself out after years of poor management.