The stock market bounced back from an oversold position (although a week later than I thought it would), but there aren’t too many reasons why it should go upward. For the most part, earnings growth is expected to be flat in the fourth quarter. The eurozone is in recession, and Germany expects next year to be tough. And there is the prospect of new austerity measures in both Europe and the U.S. So, other than the highest-yielding stocks, there isn’t a lot of reason to be a buyer in this market.
Some corporations increased their dividends this year, but I would say more are choosing to buy back their own shares instead, and this is troublesome. This means that investment capital is not being reinvested in a new plant, equipment, or employees, and shareholders aren’t really getting ahead. It’s kind of like a corporation implementing its own austerity measures, while trying to keep shareholders happy. A lot of corporations are using this environment of artificially low interest rates to borrow money from the bond market, and then use it to repurchase their own shares on the stock market, which is not a good long-term strategy.
So while I’m not bearish on the stock market, I’m realistic. The interest rate cycle does favor equities at this time, but it’s a pretty good bet that interest rates aren’t going to go down any further. I’d be very reticent to be a buyer in this market, not just for the reasons mentioned above; but also because investment risk for stocks is very high. (See “Warning: QE3 Rally Is Now Over.”)
Austerity measures are required in Europe because of the region’s sovereign debt problem. They are also required in the U.S. because of the annual deficit; but new austerity measures for the U.S. mean the country risks falling back into recession. Austerity measures are a double-edged sword; they are required, but in a reasonable way.
To me, when the S&P 500 is below 1,400, it represents a stock market that’s breaking down. This week’s bounce-back was on very low volume, which signals a real lack of conviction in equities. Economic data from China are showing an uptick, but this isn’t enough of a reason to be a buyer in the U.S. stock market. With the prospect of new austerity measures in both the eurozone and the U.S. in 2013, dividends will likely be the only investment returns from stocks.
Get Ready for a Zero Return Stock Market in 2013 was last modified: November 25th, 2012 by Mitchell Clark, B.Comm.
Mitchell Clark 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, including Micro-Cap Reporter, Income for Life, Biotech Breakthrough Stock Report, and 100% Letter. Mitchell has been with Lombardi Financial for 17 years. He won the Jack Madden Prize in economic history and is a long-time student of equity markets. Prior to joining Lombardi, Mitchell was a stockbroker for a large investment bank. In the... Read Full Bio »
Forecasts Aug. 30, 2015
Immediate term outlook:
The bear market rally in stocks that started in March 2009, extended because of unprecedented central bank money printing, is coming to an end. Gold bullion is up $1,000 an ounce since we first recommended it in 2002 and we are still bullish on the physical metal.
Short-to-medium term outlook:
World economies are entering their slowest growth period since 2009. The Chinese economy grew last year at its slowest pace in 24 years. Japan is in recession. The eurozone is in depression. With almost half the S&P 500 companies deriving revenue outside the U.S., slower world economic growth will negatively impact revenue and earnings growth of American companies. Domestically, America’s gross domestic product grew by only a meager 2.3% in the second quarter, which will negatively impact an already overpriced equity market.
Estimates Aug. 30, 2015
Trailing 12-month EPS for Dow Jones companies (Most Recent Quarter)