Stock Market Success: Why It All Comes Down to the Fed

Stock Market SuccessSome of the economic news coming out of the eurozone lately has been better than expected, but the numbers are still showing contraction in the economy and unemployment is at a record high. The stock market might still be in an upward trend, but I’m not bullish going into 2013. Here’s the thing about the current state of the economy—the Federal Reserve is very much onside in terms of policy and practicality; you never want to fight the Fed if you are a stock market investor.

This is why the main stock market indices could rally right into the first quarter of 2013. And share prices aren’t expensive, even with so many blue chips trading right at their highs. So, while the global economic reality continues to be weak, the stock market is likely to keep appreciating over the near term. (See “Why Are So Many Stocks Hitting New Highs in the Face of Very Big Risk?”)

For speculative investors, I continue to like a portfolio with gold and silver stocks and with some exposure to the biotechnology sector in terms of a general strategy. Gold and silver stocks are highly cyclical, while biotechnology stocks are not. But the best stories in this kind of market continue to be about large-cap dividend paying stocks. And even if earnings growth is mediocre, we’re still going to get a lot of companies raising their dividends and increasing share buybacks to keep investors happy. The giant cash hoard that a corporation has doesn’t help the employment situation, but it serves investors who are seeking dividends extremely well. Below is a stock chart on Cracker Barrel Old Country Store, Inc. (NASDAQ/CBRL), which is an example of a company that just increased its dividends substantially:

Cracker Barrel Chart

 Chart courtesy of

A lot of institutional investors were caught off guard by the stock market’s strength this summer, and right now, there is a bit of a bandwagon rally going on. But it all comes down to one thing—not wanting to fight the Fed, even if most investors didn’t think that a third round of quantitative easing (QE3) would do much to help the Main Street economy.

This earnings season, corporations don’t have to surprise to the upside, they only have to meet expectations and visibility for the fourth quarter. U.S. balance sheets are in excellent health, and we’re already seeing lots of announcements related to increased dividends; this is also a boost to investor sentiment. So while I’m not very bullish going into 2013, I do expect the main stock market averages to keep ticking higher in the fourth quarter. They can do so because of their valuation and increasing dividends, and because the Fed is onside. It may not be rational in the face of such lackluster economic growth, but it is what it is.

Near-term, I expect continued weakness in the economic news. Third-quarter earnings should be decent, with increasing dividends from many blue chip companies. The stock market is likely to keep ticking higher. Next year, anything is possible.