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

Posts Tagged ‘large-cap companies’

Stock Market Trading Action Signals Breakout Coming

By for Profit Confidential

Stock Market Trading ActionEver since the beginning of June, when the stock market came out of its correction, there has been seesaw-trading action with three meaningful peaks and valleys in the S&P 500 Index. We’re now working on the fourth, and who knows where it will lead.

Expectations for corporate profits continue to come down, and any positive investor sentiment is likely due to the lingering hope for additional monetary stimulus from the Federal Reserve. It really is a wacky stock market these days, because there is no certainty. Stock market investors don’t have any reasonable expectation of what their holdings might do, and therefore, investment risk remains very high.

The only thing that’s reasonable for equity investors to feel certain about is the outlook for dividends. Corporations continue to hoard cash, because they too feel the uncertainty in their operations. So why invest in new plant equipment or employees when the global picture is so cloudy? And even if dividend payments aren’t going up, there is so much cash on corporate balance sheets that most large-cap companies are assured of continued dividend rates through the worst of recessions.

Because expectations for corporate profits are falling, so are expectations for increased dividends. Even though corporations can afford it, we’re likely to see fewer companies raising their dividends to shareholders, particularly if general economic growth remains weak. You know you’re in tough times when the stock market goes up after second-quarter economic growth is reported at 1.5% on an annualized basis.

Dividends have been a stock market investor’s best friend for the last decade, and if you think the U.S. economy will toy … Read More

Stock Market Correction: Why it’s Limited

By for Profit Confidential

earnings seasonsUnless we get a major shock like war or something related to the sovereign debt crisis in Europe, I don’t think the stock market is going to experience a lot of further downside. Stock prices might drift and then trade range-bound for a couple more months, but stock market valuations are fair and this provides a lot of cushion.

I do think there is more downside potential in gold, silver and oil prices and it’s not just related to slower growth in the global economy. A lot of the price weakness in these commodities is related to strength in the U.S. dollar, which experiences renewed enthusiasm every time there’s an uncertain development in the eurozone.

There remains, in my view, an underlying strength to the stock market at this time. Institutional investors want to be buyers in this market; they only need a reason to do so. I fully expect that large-cap companies that pay dividends will continue to be the market leaders going into 2013, because, in a slow growth environment, dividends income is crucial. I think it’s fair to conclude that expectations for capital gains are fairly low among all stock market investors, so dividends become the only way to beat the inflation rate.

Because we’re now in the lull between earnings seasons, increased dividends announcements are reduced. I think we’ll get another round, however, during second-quarter earnings season, largely because companies can and want to keep shareholders happy. The cash hoard among most large-cap companies remains substantial.

When share prices go down, yields for dividends go up of course. Most of the stock market’s leaders haven’t actually … Read More

Stock Market Correction’s Here—Put Dividend Paying Stocks on Your Radar Screen

By for Profit Confidential

earnings seasonThis is the correction we’ve been expecting and it’s affecting stocks as well as commodities. The stock market has been due for a correction after a solid first-quarter earnings season and, because share prices moved so strongly since the beginning of the year. It doesn’t really matter what the catalyst is for the correction; it is well-deserved and a healthy development in my view.

I think the S&P 500 Index is vulnerable now to the 1,300 level and, if it gets there, this would be a meaningful correction and a good buying opportunity for higher dividend paying, large-cap companies. Generally speaking, I think we’re in a time now where the stock market will be more apt to reward income over growth. Large-cap, dividend paying stocks have been leading the stock market since last October and I think this trend will continue right into 2013.

Along with large-cap stocks, both smaller companies and commodities are also experiencing a pullback. Growth concerns in the global economy are real and whether it’s related to price inflation in China or sovereign debt problems in Europe, the new normal is slower economic growth rates, especially among mature economies.

I don’t see any reason why the U.S. stock market can’t reaccelerate this year, especially as we are likely to see sporadic improvement in the economic news. And, while the outlook for corporate earnings isn’t robust, it’s still solid and stock market valuations are reasonable. Investment risk remains high for all equities, but it’s been like this since the financial crisis.

I think that big corporations are keeping earnings expectations purposefully low, in order to outperform come … Read More

The Equity Market Can Handle Slow
Growth—Just Not a Contraction

By for Profit Confidential

Equity Market Can Handle Slow GrowthIf the S&P 500 Index is trading close to the 1,400 level, then I view the equity market as being in good shape. We’re getting a bit of a consolidation now and this is completely normal after the flurry of corporate earnings from large-cap companies. Many smaller companies are only now beginning to report their earnings reports, but this is an equity market that’s focused on large-caps. They have been and I believe will continue to be the outperformers this year. (See Benchmark Stocks Reporting Great Earnings—But the Stock Market Bet on this Already.)

Institutional investors are waiting for a new catalyst to invest in this stock market; without one, the equity market will drift. There is a normal lull in share prices after an earnings season and it’s because the corporate news is over and share prices rose in anticipation of the numbers. Why buy a stock after it reports numbers the Street was looking for? I still believe that investors don’t have to be in any rush to consider new positions in the current environment. If we got a major correction in the equity market, then I’d say add to existing positions. Overall, though, I expect the stock market to become very vulnerable around the time of the U.S. election and going into next year. I could be wrong on this, but I don’t see economic growth accelerating much more than its current rate.

The U.S. economy and the stock market can move forward just fine in a slower growth environment. We just don’t want to see contraction in gross domestic product (GDP) and that’s why the … Read More

The Stock Market’s Near-term
Trend Is That There Isn’t One

By for Profit Confidential

economic newsI have a strong sense that the stock market trading action we’ve experienced over the last several months will continue over the next quarter or so. One day, the stock market will be up on some positive economic news; the next day, the economic news will point the other way. The stock market is at its current level largely due to two equal factors—the Federal Reserve and reasonable valuations. At the beginning of the year, the U.S. central bank said just what institutional investors wanted to hear—it will support the economy further if necessary. This lit the fire of equity market buyers and, because current corporate earnings support current valuations, the market has held up well.

The trading action since the March 2009 low set during the financial crisis has been remarkably repeating itself quite succinctly. When economic news showed improvement, the stock market accelerated briskly and after a while the trend experienced a meaningful correction. After several months of correction, another decent piece of economic news sparked another upward leg. Just pull up a four-year stock chart on the S&P 500 Index and you can see the consistency in the trading action.

Extending this consistency to the near future, it would seem that we’re on the final leg of a stock market that’s ready to top out and experience another correction. According to the chart, the length of the upward price trends since March 2009 is getting shorter and this leads me to believe that the stock market is setting itself up for a big top, not just another correction. This, of course, is a gut-feel type of analysis. … Read More

The Best Performing Index Over the Last 12 Years

By for Profit Confidential

institutional investorsMy gut tells me that the stock market will soon come to a head in terms of its direction. The stock market is looking for a new catalyst and, whatever that is; share prices will advance or retreat. We’re at the beginning of the lull between earnings seasons (although many small-cap stocks are just starting to report) and economic news will take over from corporate news. I think a key stock market indicator to focus on remains the Dow Jones Transportation Average. This index keeps narrowing its trading range and just looks like it’s ready for a new direction, whatever that might be. Transportation stocks have held up incredibly well considering the price of diesel and gasoline and their earnings as a group continue to outperform.

Many view the Dow Jones Transportation Average as an “out of date” kind of index, but I view it as critical. For the most part, virtually everything in our lives comes to us by truck, rail, airplane or boat. (See My Favorite Benchmark Stocks That Lead the Stock Market.) It represents, in my view, the real pulse of the U.S. economy and, while vulnerable to the spot price of oil, strength in this index is strength in a consumer-driven economy.

Since the beginning of 2000, the Dow Jones Transportation Average has outperformed the NASDAQ, Dow Jones Industrials, and the S&P 500 Index. When technology shares imploded on the stock market beginning in 2000, the Dow Jones Transportation Average began to outperform. It did very well between 2004 and 2009, retreated with everything else during the financial crisis, then roared back to a new … Read More

Dividend Increases Soar as Companies Return Excess Cash

By for Profit Confidential

U.S. economyAs expected, there have been a lot of dividends increases from big, brand-name companies with excess cash on their books. New business investment is somewhat lagging given all the risks in the marketplace, so it’s much easier for companies to increase their dividends and/or initiate new stock market buybacks. This is, after all, what stock market investors’ want.

It’s pretty clear that the U.S. economy isn’t accelerating; it’s just slowly moving forward with an improving underpinning. What was evident in the recent gross domestic product (GDP) news was that the inflation rate is affecting GDP growth and it’s not only due to higher energy costs. Consumers have to spend more to attain the same amount of goods and that puts the brakes on economic growth.

For the most part, however, investor sentiment in the stock market remains positive and the corporate news is mostly good enough for institutional investors to be buying. And this is what they are buying—large-cap companies with increasing dividends.

We’ve had all kinds of increased dividends announcements from the big companies that you know, such as IBM (NYSE/IBM), Johnson & Johnson (NYSE/JNJ), American Express Company (NYSE/AXP), DuPont (NYSE/DD), ExxonMobil Corporation (NYSE/XOM), Procter & Gamble Co. (NYSE/PG), and the list goes on. (See Dividends: The Only Way to Keep the Mini Bull Market Alive.)

This makes the S&P 500 Index appropriately valued at 1,400 and, if the economic news holds relatively positive, we just might get another 10% in price appreciation from the stock market this year. Nothing should surprise you when it’s an election year. The Federal Reserve seems intent on keeping stock market investors … Read More

Benchmark Stocks Reporting Great Earnings—But the
Stock Market Bet on this Already

By for Profit Confidential

investor sentimentThe first thing that consumers do when a recession or financial crisis hits is cut discretionary spending. That’s why a benchmark stock like Harley-Davidson, Inc. (NYSE/HOG) feels the pain immediately. HOG’s stock market value plunged in the last half of 2008, as the recession took hold. Then the financial crisis hit and it took three years for the shares to recover. HOG used to be a stock market darling.

As a kind of benchmark stock for discretionary (luxury) spending, the company’s first-quarter earnings report was excellent. It reported a 20% increase in total retail sales of new Harley-Davidson motorcycles worldwide. In the U.S. market, retail sales grew an impressive 25.5% and more than a third of motorcycle sales were to riders who were new to the brand. First-quarter revenues grew 20% to $1.27 billion and net income grew 45% to $172 million.

On the stock market, HOG is trading at a new 52-week high, but is only now back to the price it was trading at in August 2000—that’s almost 12 years ago! As a benchmark stock in the consumer goods sector, the company’s earnings and visibility are positive indicators. International sales are a growing portion of revenues, but that’s the case with most large-cap companies nowadays.

Another benchmark stock that is worth following is Caterpillar Inc. (NYSE/CAT), which reported another record quarter for earnings and raised its guidance for the rest of this year. The company’s total revenues grew 23% in the first quarter to $15.98 billion and earnings grew 29% to $1.59 billion.

After reporting some softness in its business during the third quarter last year, the stock Read More

Gold and Silver Stocks Drifting, But Mining Stock Fundamentals Just Keep Getting Better

By for Profit Confidential

gold mining companiesRight now, precious metal stocks aren’t performing that well, even though many gold mining companies are reporting record production and earnings. Furthermore, corporate visibility at many gold mining companies is rosy, yet, as a group, precious metal stocks are mostly down since the beginning of the year. The reason, of course, is that spot prices for gold and silver have pulled back in price, but in my view, the pullback is part of a well-deserved correction/consolidation. I’m certain there is investor fatigue in precious metal stocks at this time and, if the trend continues, valuations will become extremely attractive. I know of many gold stocks that are undervalued considering their growth prospects.

As a group, precious metal stocks are just as volatile as their underlying commodities. This is no revelation. But, as a sector, institutional investors tend to take on limited exposure to precious metal stocks once a major price trend is already established. I view institutional investors as being the ultimate herd investors when it comes to precious metal stocks. So, as individual investors, we have to roll with this reality.

There really is only one big tool left in the Federal Reserve’s kit and that’s money supply growth. If you believe that the major increases in global money supplies will be inflationary, then real assets like resources and real estate should be a focus. I believe that exposure to gold and silver is an absolute must for any balanced investment portfolio. I also believe that precious metal stocks remain one of the most attractive stock market sectors for equity speculators. (See One of the Best Sectors for Risk-capital Read More

Event Trading on Dividends—This Is the Market for It

By for Profit Confidential

dividend payoutsBecause the Federal Reserve created an environment of artificially low interest rates, investors both large and small are craving income. You can’t get any real return from cash and the opportunities in bonds just barely cover the inflation rate and have long durations. Real estate investment trusts (REITs) can yield a greater amount of income, but a lot of investors are wary of these securities. This is why large-cap, dividend paying stocks have done so well lately, because no other asset class generates any material income for investors. Dividends are an income stream, but also provide security in a very uncertain world.

When the Federal Reserve announced several months ago that it would keep interest rates low and stable for an extended period of time, the stock market was handed a big gift. Institutional investors have been very active, pouncing on shares of companies that announce increased dividend payouts, and I think we’re going to see many more positive dividends announcements in the near future. I will be very surprised if we don’t.

This is why I’m much more bullish on large-caps as a stock market group. (See Must-haves for Your Stock Market Portfolio.) Big companies that pay dividends are the best bang for your buck in the age of austerity and high sovereign debt. We’re not in a stock market environment at this time that rewards speculative investing. Commodities continue to prove their inherent volatility and smaller companies aren’t being pursued by institutional investors. There are always good trades out there, but with stock market valuations reasonable, a large-cap dividend paying stocks can move just robustly as any … Read More

It’s All About the Momentum—as Soon
as It Slows, the Stock Market’s Done

By for Profit Confidential

earnings seasonThe stock market’s recent pullback isn’t the kind of correction the market needs. Recent trading action is more about a lack of buyers than outright selling. The S&P 500 Index ran up quickly to 1,420 and was definitely in need of a break. With stock market buyers having already placed their bets before this earnings season begins, the recent pullback was only natural.

The Federal Reserve was right to say that further monetary stimulus would not be necessary if current momentum in the U.S. economy continues. I feel that the Federal Reserve already has too much stimulus in the system and that interest rates are artificially too low.

This earnings season, I think we’re going to get another mixed bag of results, with some industries doing much better than others. The key will be all about expectations. Since the fourth quarter of 2011, current expectations this earnings season are quite lofty.

I repeat my view that the stock market is likely to top out this year, so I’m not a big advocate of taking on major new positions. This earnings season is likely to be decent and so might the second quarter. But the U.S. economy is coming due for another slowdown or recession and I think that there isn’t enough momentum currently for the U.S. economy to accelerate going into 2013. With the BRIC countries slowing, it’s going to be equally difficult for corporate earnings to accelerate. U.S.  have padded their earnings over the last several years from strong international operations, particularly in Asia. This is changing now and so must investor expectations.

If the stock market is … Read More

Dividends: The Only Way to
Keep the Mini Bull Market Alive

By for Profit Confidential

bull marketI think this year’s bull market is still alive, but it will take good corporate earnings and visibility to carry it forward. We’ve had a really good run up until now and the current price consolidation is not unexpected. I want to reiterate that the stock market is still very fraught with risks that are based on fragility in the U.S. economy and outside factors like the sovereign debt crisis in Europe and geopolitical concerns in the Middle East. I suppose these risks have been with us for years, but I know that investor sentiment is delicate enough to turn this stock market on a dime.

I still believe that a conservative investment stance is warranted and I would not be a big buyer of new positions in this stock market. In my view, the stock market is in the process of topping itself out after a long period of recovery from several big shocks. This doesn’t mean that the stock market won’t be higher at the end of this decade than it is now, but I do see a lot of problems over the next couple of years. Monetary stability, positive investor sentiment and reasonable equity valuations are responsible for carrying the stock market so far this year. What’s required going forward is confirmation in the economic news.

As part of a conservative investment stance, I’m a big believer in large-cap companies that pay dividends. Anybody reading this column over time knows this. The fact of the matter is that large-caps have performed exceptionally well since the financial crisis low in March 2009 and they’ve proven to be … Read More

Why this Market’s Poised for Another 10% Gain

By for Profit Confidential

dividend paying stocksWe’ve seen a lot of increases in dividends lately and it’s a trend that should last throughout the next couple of quarters. The stock market has also been bolstered this year by a strong performance from the financials. U.S. bank stocks were beaten down hard (as they deserved), but their resurgence is a very positive sign for equities. The stock market needs leadership from technology and financials if it’s going to move higher in a meaningful way.

While the NASDAQ has been shining since the beginning of the year, large-cap companies that pay dividends have also been a big part of the story. (See Why the NASDAQ Blasting by the Dow Jones Is Another Positive Signal.) I continue to think that large-cap, dividend paying stocks are the place to be in this stock market—a market that is fairly priced but still vulnerable to all kinds of shocks.

The recovery in the U.S. economy is happening, but it’s happening slowly. If you are a large corporation that’s sitting on piles of cash, you likely are going to use a mixed strategy going forward that includes modest business investment combined with increased dividends and/or share buybacks. Recent data on durable goods orders illustrates this point perfectly.

There is a lot of anticipation now in the stock market regarding first-quarter earnings and corporate visibility. Don’t be surprised if the stock market sells off on good financial news—that’s what the stock market does—investors buy on anticipation and sell on reality. The stock market is due for a bit of a correction after its strong run since the beginning of the year and this … Read More

With Emerging Market Slowing,
Corporate Earnings Are the Key

By for Profit Confidential

dividend paymentsIt’s my contention that the stock market is engaging in a slow process of topping out. The stock market usually likes to lead the economy and, while corporate earnings have been surprisingly strong ever since the financial crisis, this has mainly been due to growth in emerging economies. Now these economies are slowing after many years of solid expansion.

The BRIC countries along with all of Asia have been the saving grace forU.S.large-cap companies. With little growth to be had in the domestic economy, their corporate earnings have been padded by international operations. And this is the worry I have: corporate earnings growth. With emerging economies now slowing (especially in China) and virtually zero growth in Europe,U.S.corporate earnings are going to have a tough time achieving double-digit growth over the next several years. My expectation is a material slowdown in corporate earnings starting perhaps this year or in 2013, which will definitely affect the prospects for the stock market.

It is certainly possible that the U.S.economy could accelerate on its own this year. The Federal Reserve (for better or for worse) has pretty much done everything a central bank can do to try and re-inflate the economy and the stock market. (See What Could Ensure a Good Stock Market Performance This Year.) The unprecedented low-interest-rate environment is extremely helpful for corporations, with debt financing very affordable. It’s also helpful for homeowners and mortgage seekers. With encouraging signs on the employment front, the housing market should also show some improvement in the near future. But the big question is: will it be enough to satisfy the stock market? We’ll find … Read More

It’s Full Steam Ahead for Stocks…if There’s No War

By for Profit Confidential

dividend paying stocksIn terms of a base, I would consider the stock market to be in good shape if the S&P 500 Index can hold 1,350. It’s been doing so for about a month now and you can’t say that stocks haven’t been due for a small correction—the market’s run up solidly since the beginning of the year.

The NASDAQ’s been the real star of the show so far and my best guess is that the stock market will soon start another upward leg, around the beginning of first-quarter earnings season. That is of course, if there’s no war with Iran, Syria, or Greek bondholders.

There have been a lot of announcements lately about increased dividends and this was expected. Increased dividends are like free gifts for shareholders and I think it’s very reasonable to expect more dividends announcements from the best large-cap companies in the market. Even though the NASDAQ is outperforming now (which is good leadership for the rest of the stock market), dividends income has been and will continue to be the best investment strategy for equity investors in a slow growth environment. The stock market’s been in a bear market since the technology bubble burst in early 2000. Without dividends income, index investors would still be below water. With all the risks out there and the new age of austerity, the best investment play is dividend paying stocks for those not wanting to sit on cash.

There was a time when I wasn’t that keen on dividend paying blue-chips. Not to their exclusion, but during the technology sector boom, the information technology revolution combined with the Internet provided … Read More

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