Lombardi: Stock Market Commentary & Forecasts, Financial & Economic Analysis Since 1986

Where the Returns From Equities Will Go

Tuesday, October 30th, 2012
By for Profit Confidential

Returns From EquitiesThe stock market is not looking that good right now. There have been plenty of days where the main stock market indices start out strong, but the price action dwindles by the end of the day. The “AGA” stocks, which are Apple Inc. (NASDAQ/AAPL), Google Inc. (NASDAQ/GOOG), and Amazon.com, Inc. (NASDAQ/AMZN), aren’t reporting the kind of growth needed to get this market moving. I think what we’re in for is a considerable period of stock market mediocrity. Because valuations aren’t high, the downside has a buffer. Dividends will be the market’s only friend this quarter.

Near term, I think we’re going to get more downside, and I would not be a buyer in this market. A full-blown stock market correction would provide a good new entry point, but the outlook in 2013 remains as conflicted as ever with all the fundamental headwinds. You might argue that the stock market’s performance over the last few years has only been due to the massive liquidity injection by the Federal Reserve. Corporate earnings have been decent, but earnings growth rates are obviously in decline.

It’s been a good year for the main stock market averages so far. The NASDAQ Composite led the other principal indices and large-cap, dividend paying stocks generated exceptional capital gains, all things considered. Looking ahead, I certainly find it difficult to be bullish. We’re almost on the cusp of a new business cycle, but it’s likely that the U.S. economy will experience more pain before this happens. Fiscal headwinds are likely to put a lot of pressure on gross domestic product (GDP) growth next year.

Going forward, I think the returns from equities will migrate to dividends paid. While the Federal Reserve talks a big game, it really can’t do anything more to help the Main Street economy. The U.S. housing market is showing improvement in terms of prices, but this doesn’t grow incomes, which is what the U.S. economy really needs.

We got a number of increased dividend announcements this earnings season, but I’m surprised there weren’t more. Instead, there were quite a few share buyback announcements, and the contrast between these is important to corporate strategies. Companies are loath to cut their dividends, but a share buyback program need not be fulfilled. Share buybacks give corporations a lot more flexibility over increasing quarterly dividend rates. The number of share buyback announcements, instead of increased dividends, is further evidence of how uncertain the outlook really is among corporations.

We continue to have non-confirmation from the Dow Jones Transportation Average, and most of the stock market’s leaders have broken down. Until the U.S. economy starts growing at a rate greater than inflation, my outlook for the stock market is now just the dividends paid.

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Mitchell Clark - Equity Markets Specialist, Financial AdvisorMitchell Clark, B. Comm. 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, such as Income for Life and Micro-Cap Reporter. Mitchell, who has been with Lombardi Financial for 17 years, won the Jack Madden Prize in economic history and is a long-time student of equity markets. Prior to joining Lombardi, Mitchell was as a stock broker for a large investment bank. Add Mitchell Clark to your Google+ circles