Stock Market Setting Up for Extended Break?

Soft Q1 Suggesting Market Set for Extended BreakThe S&P 500 index really hasn’t done much since the beginning of the year but churn…but then again, why shouldn’t it?

For stocks, 2013 was an exceptional year. If we get another positive year on top of dividends, then it’s total gravy.

The capital gains over the last several years have been highly unusual, representative of the gains often seen after a major financial crisis.

There are no bandwagons to jump on in this stock market. Investor sentiment finally had a bit of an awakening over the last several weeks. Big investors booked some profits after the big price recovery in February, which occurred because of verbal reassurances by the new Fed chair, Janet Yellen. If there wasn’t further hand-holding from the Fed, stocks likely would have continued January’s sell-off into a full-blown correction, helped by events in Ukraine.

I’m of the mind that the stock market may take an extended break over the next two quarters, as it’s so often done in the past—probably more of a price consolidation over a correction; top-line growth is still pretty modest.

I’m still a big fan of dividend income and also a higher weighting given to cash within a portfolio context. Very little stands out in this stock market as an exceptional buy. There are some exciting innovations in the marketplace, but valuations for many of these stocks are still way off the charts.

Precious metals continue to prove themselves as an unreliable asset class. Spot prices are stuck and all-sustaining mining costs per ounce are still going up. It’s a tough road ahead for precious metals stocks.

But this is always the case with resource stocks. They trade in their own manias, peppered with long periods of nonperformance.

Goldcorp Inc. (GG) is a top-notch, well-managed gold miner, but the stock is now trading where it was at the beginning of 2006. Comparatively, Colgate-Palmolive Company (CL) is up around 140% on the stock market, not including dividends, during the same period.

There is a role for resource stocks as part of a portfolio. Oil and gas seem to be a much more burgeoning sector, both operationally and in capital markets. A lot of junior energy producers, particularly those stocks associated with Bakken oil, have seen their earnings catch up with share prices. It’s a positive development and many of these positions can do well this year.

The proof is always in the numbers and so far this earnings season, they’ve been a little soft. Within the context of a secular bull market, the economy can experience a recession and stocks can correct significantly.

I think 2013 was a breakout year from the stock market’s previous long-term trend, which was a long recovery period after the technology bubble burst.

In terms of investment themes going forward, I think dividend income and dividend reinvestment are key as a strategy for those not requiring income. I still like energy and natural gas, in particular, as well as energy pipelines and storage related to the sector.

Industrials have good economies of scale to expand their earnings through a combination of higher volumes and prices, and blue chip balance sheets remain in excellent shape. (See “The Dividend-Paying Blue Chips That Also Deliver Significant Capital Gains.”)

Stocks look poised for a meaningful break after first-quarter earnings season, still within the context of a secular bull market and a new business cycle.