Smaller companies are the backbone of the economy, but they are also the ones that struggle the most when the domestic economy isn’t growing. Accordingly, domestic small-cap stocks should have a more difficult time than larger companies that can “pad” their earnings from international operations and a weaker dollar. This is why I expect the Dow Jones Industrial Average (DJIA) to outperform all other major home indices going forward.
For the year, the DJIA is down about 2.5%, while the S&P 500 Index is down around six percent and the NASDAQ is down about 5.5%. With dividends, the DJIA is about breakeven, which is an accomplishment these days.
Some of the best stocks that have done well since the low set in March of 2009 have been breaking down lately. These include: Caterpillar Inc. (NYSE/CAT), IBM (NYSE/IBM), DuPont (NYSE/DD), The Procter & Gamble Company (NYSE/PG)…and the list goes on. For the last two years, the top stocks have been large-cap, dividend-paying securities with major international operations.
Caterpillar is an important benchmark company to follow. Its second-quarter earnings came in a little light and the stock sold off on the news. The implication is that the global economy is slowing down, not just the U.S. economy. IBM is faring a little better, as its services business continues to be a jewel of an enterprise. But now, even the strongest economy in Europe (i.e. Germany) is experiencing the same slowdown that’s occurring in most mature economies.
According to SEC filings, Warren Buffett’s company is buying shares in this market. But then again, that’s what you do when you’re sitting on $48.0 billion in cash. There really isn’t any other strategy to undertake with the exception of investing in real estate.
We’re in a market that’s stuck under the weight of declining expectations. Economic data continue to come in soft and the trading action reflects this. My read is that the stock market is going to trade in a range around its current level for quite a while. Higher-dividend-paying stocks will outperform, because institutional investors are starved for investment returns. With little prospects for growth in the domestic economy and declining expectations for growth in the global economy, corporate dividends are becoming the most attractive asset out there.