Equities Market Looking for Reassurance – That’s All It Needs

Equities MarketThe stock market’s been struggling over the last few weeks, trading off of fears in the eurozone. The stock market is still in decent shape, however, if the S&P 500 index can hold above 1,300, which I think it will. We’re almost upon second-quarter earnings season, and this is exactly what the equities market needs. Investors need to hear from companies themselves.

We’ve already had a number of earnings reports that beat consensus, although some forecasts have disappointed. The equities market has reacted tamely to the earnings news so far, largely because of worries about Europe. The bigger worry (related to the stock market) isn’t the sovereign debt crisis in the eurozone, as far as I’m concerned; it’s slowing growth in emerging markets. The problems in Europe have been going on for years and will likely continue. While the stock market trades off these worries, economic growth in China, India, and Brazil is a more fundamental risk to the equities market and your portfolio.

The equities market today is still without trend or conviction. Accordingly, there’s not a lot of bold new action to take. I expect that we’ll get more news regarding increased dividend payments for the simple reason that big-cap companies continue to sit on piles of extra cash. Corporate visibility is the key to the trading action this earnings season. If corporate outlooks go down, the equities market will go down.

We should get another strong quarter from the industrial economy, which is benefiting from a strong performance from automakers. It will be important to see what the retail sector has to say; the banking sector also always initially moves the stock market. On balance, I’m not expecting much this earnings season. The stock market just needs some reassurance from corporations; institutional investors aren’t expecting any big reacceleration in growth.

Mid-July we’ll hear from railroad stocks, which to me is a very important indicator for the economy and the equities market. The railroad sector is the backbone of the U.S. economy. For the most part, you can get a good sense of the state of the U.S. economy if you follow the railroad and retail sectors; you get the view on the industrial and consumer economies, which covers a lot. We might actually get some surprises from railroad companies because diesel fuel costs have been coming down. Whenever railroad companies say business is decent, I worry less about the state of things.

The stock market continues to have a very fair valuation and that’s a real positive. Fairly valued stock prices went a long way to tempering the stock market’s recent correction. (See “Oil Prices Say Zero Growth, While Stock Market Holds up in Current Correction.”) Investor sentiment is still pretty fragile these days, and it’s because of all the uncertainty. If the equities market is to advance in the bottom half of the year, it will need reassurance that there is economic growth out there.