By Mitchell Clark, B.Comm. — Ahead of the Street column
Time really does fly when you’re having fun. We’re just on the cusp of another earnings season and an important one at that. This time around, corporate visibility will be everything. The broader market has already priced in solid first-quarter earnings results and, if there are disappointments, institutional investors will be harsh. There have been some tremendous performances in the large-cap sector of the market since the beginning of the year. Not only has the large-cap technology sector led with significant gains from such great brand name companies as Microsoft, Oracle and Intel, but other big industrial companies like DuPont, United Technologies and even Caterpillar have also gone up significantly in value while paying solid dividends.
I still think the big story this year will be corporate earnings and the performance of large-caps. We’ll likely get some consolidation around Dow 11,000, but if companies report good visibility going forward, stocks could easily advance further. We haven’t had much if
any earnings warnings from big companies and this bodes well for the near-term outlook for stocks. Clearly, just owning the market looks to be a decent strategy this year.
If you haven’t noticed, there’s quite a bit of price inflation that’s occurring around the world. This is a double edged sword for investors. While rising prices hurt consumer demand, they do help big companies right at the bottom line. This is especially the case this year.
As consumers and investors, we need to be prepared for a sustained period of higher inflation. This means that commodity-related investments should outperform, as well as those industries that can increase their prices without curbing much in the way of demand.
The technology sector is ripe to benefit from this trend.
Another beneficiary of general price inflation in this recovering economy is the real estate market. Price inflation in real property is just what the housing market needs. The downside to this expected trend is rising interest rates, but I think there’s a good balance
developing in monetary policy right now. The Fed knows that inflation is coming and that rates are going to have to rise. But, interest rates are still low enough that any increases shouldn’t sideswipe the economic recovery.
I have to say, monetary policy is looking good to me. The big problem going forward is fiscal policy, and this is the same problem that’s plaguing European countries right now. As things stand now, I think the economy will take care of itself and get back to a normalized growth rate very soon. If, however, sovereign deficits and debt aren’t under control in the next two years, then we have the makings of another financial crisis that could sideswipe the global economy once again. There are some tough decisions to be made over the coming quarters, and fiscal policy will become the pressing issue for capital markets going forward.