The pull-back in commodity prices is a healthy development. No market benefits when prices go straight up without taking a break. I think we’ll find that the price of oil consolidates for a while, but it should reaccelerate in the bottom half of the year, as global economic growth takes over supply. There has been quite a bit of speculative fever on the part of institutional investors in the oil market and the big trade has gone away. Silver was ripe for a correction, as is gold now, although the spot price of gold continues to have a resilience that is outperforming other precious metals.
The story this year continues to be with large-cap equities. Big corporations with global operations are benefitting from stronger currencies abroad and much stronger growth in Asia. In addition, the ability of a big corporation to control its costs really adds strength to the bottom line, even if revenue growth is stagnant. Companies like PepsiCo, Inc. (NYSE/PEP), DuPont (NYSE/DD) and Caterpillar Inc. (NYSE/CAT) are but a few global businesses that illustrate the point perfectly. These stocks are trading right at their 52-week highs—and the kicker is that they pay great dividends as well. This year, the speculative end of the equity market has seen great success in gold stocks. At the more conservative end of the market, global large-caps are cleaning house. It has been and will continue to be an excellent time to own the right large-cap stocks.
I say the “right” stocks, because not all industries are experiencing the same degree of success as others. The key is to own a company that has global reach, will benefit from a weaker dollar, and has the pricing power to accelerate earnings more than the growth rate of revenues.
Currently in this market, share prices are ripe for a correction or period of consolidation. But I would add that the outlook for corporate earnings over the coming quarter remains solid. Stock prices will always gyrate with the news of the day, but, fundamentally, business is looking pretty good.
Over the coming quarters, investors can expect other central banks in Western countries to lift their interest rates and this will put pressure on the U.S. dollar. It will also put pressure on the Federal Reserve to become more hawkish with its interest-rate policy. There is more price inflation coming down the road and global capital markets will soon begin to squeeze the Fed ever so slowly.
Currently, there’s no big rush to take much in the way of new action in a diversified equity portfolio. The broader market is likely to churn for a while and the economic data will be mixed. The key for investors is to focus on what corporations are saying in terms of earnings expectations and visibility. This has proven to work tremendously well in the recent past and will continue to do so for the rest of the year.