Why Economic Growth Doesn’t Guarantee Rising Share Prices

Why Today's Earnings Are for Yesterday's Stock PricesTrading action in stocks has been all over the map so far this year, while investor sentiment remained generally positive. The fact that there was a bunch of profit-taking after the solid recovery in February and March is neither a surprise nor unnatural for a market at a high.

The Federal Reserve continues to be more than accommodative to Wall Street with its words of comfort and its willingness to provide continued monetary stimulus past previously stated benchmarks.

Near-term, geopolitical events in Ukraine are likely the biggest risk for stocks. It’s been a slow start this earnings season with unremarkable results, but the numbers aren’t that bad. Growth is growth.

The NASDAQ Biotechnology Index has just now crossed its 200-day simple moving average, if that’s meaningful. It’s done so several times over the last five years and recovered after a period of consolidation.

Biotechnology stocks aren’t worth paying a lot of attention to in terms of portfolio strategy. These risk-capital stocks trade on their own unique set of business fundamentals. They’ve been powerhouse wealth creators for sure over the last few years. They are due for an extended break.

I think the best plays in this market are still with dividend-paying blue chips as they experience price retrenchments. These stocks continue to have a tremendous amount of favor with big investors in a slow-growth environment. Dividend income is very important when top-line growth is in the single digits.

For those equity investors wanting to take on positions in this market, I’m still a fan of existing winners, particularly among the brand-name stocks that have distinguished themselves with long track records of rising dividends and operational growth. Some of these companies include 3M Company (MMM), Johnson & Johnson (JNJ), Union Pacific Corporation (UNP), NIKE, Inc. (NKE), and Colgate-Palmolive Company (CL).

There is no rush to be buying a stock market at an all-time high. A lot of the growth provided by corporations over the last two quarters is about operational earnings catching up to share prices—prices that went up in anticipation.

An important benchmark company and Dow Jones Transportation Average component, J.B. Hunt Transport Services, Inc. (JBHT) reported results that met consensus on revenues, but came in slightly below on earnings due to some higher expenses. (See “Short-Term Market Softness Abounds.”)

For the 2014 first quarter, sales grew a solid nine percent to $1.4 billion and would have been higher if not for some rail service disruptions and weather-related delays affecting intermodal load growth.

Sales growth in the transportation sector is a good sign that things aren’t coming apart. Stocks may very well stay jittery and retrench this entire earnings season. If the downside continues, it’s a well-deserved correction, considering the multiyear uptrend.

Stocks may just keep the brakes on right through to the fourth quarter. Major upside seems pretty unlikely as there is no momentum with earnings.

But balance sheets remain strong and the cost of capital (for corporations) is cheap. Rising dividend announcements should be weighted to the fourth quarter.