One of my biggest concerns about the stock market in recent history has been the lack of confirmation from the Dow Jones Transportation Index. This index hasn’t done a thing in the last five years, and even though it has recovered somewhat since the beginning of October, it has been in a slow, but definable, downtrend since February. I can see why some technology stocks hit new highs this summer, and I can understand the stock market’s reasonable valuation given current earnings, but the lack of uptrend among transportation stocks is telling. We’re not in a bull market, that’s for sure—just a Federal Reserve-induced price recovery—a recovery that, to me, looks like it’s almost over.
I don’t want to be bearish about the stock market, but I’m certainly becoming less enthusiastic about the ability of large corporations to generate meaningful earnings growth going into 2013. I mean the writing is on the wall—so many blue chips are now coming up short on revenues, and you know that earnings are going to follow right behind. There is economic growth out there; some industries are doing better than others. But with the eurozone in no-growth mode and Japan in a similar state, seven-percent gross domestic product (GDP) growth from China isn’t enough to keep things going. Again, I repeat my view—don’t buy blue chips right now; they should be a lot cheaper early next year.
I’ve actually been amazed how well so many stocks have done over the last 12 months; and dividends have been going up. For the long-term stock market investor with established positions, your only friend over the next year or so will be dividends and gold. Reinvested dividends and share buybacks are proven wealth-creators, even when earnings growth is flat. But the stock market has already gone up in anticipation of current fundamentals; all the good news is priced in.
If there is one company with operations representative of the current state of the stock market, corporate earnings, and the future, it’s E.I. du Pont de Nemours and Company (NYSE/DD). This blue chip has mostly led the action in the broader stock market, peaking before the market does and recovering with greater fervor. E.I. du Pont is likely to grow its earnings in 2013, but expectations for revenue growth are flat. The stock had a good start to 2012, but it started breaking down in May and hasn’t quite recovered. E.I. du Pont has trailed the S&P 500 over the last six months and, in my mind, its business conditions more accurately represent the current of state of things than the stock market has bet on. E.I. du Pont’s near-term stock chart is below.
Chart courtesy of www.StockCharts.com
Recent earnings results from General Electric Company (NYSE/GE) and Honeywell International Inc. (NYSE/HON) were decent, but they basically met expectations; the companies also tightened their fourth-quarter visibility. (See “Is The Stock Market Where It Should Be After QE3?”) All the big companies are saying that the operation environment is challenging, but most still expect earnings growth in 2013; and combined with dividends, this is an environment in which the sky isn’t falling.
I’m extremely cautious on the near-term outlook for the stock market. While third-quarter earnings aren’t bad, they’re not great either, and it will be difficult for the stock market to advance without some new catalyst.
Good News Is All in and the Sky Isn’t Falling…Yet was last modified: October 22nd, 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. 31, 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. 31, 2015
Trailing 12-month EPS for Dow Jones companies (Most Recent Quarter)