If you thought that the sovereign debt issue has gone away, you’d be greatly mistaken. This issue still represents a serious threat to your pocketbook and there remains a good probability that there will be euro currency destabilization. When currencies come into question, all capital markets are in for trouble.
From the investor’s point of view, I think a very conservative approach is warranted given the fundamentals of the global economy. The economy’s in a slow growth environment coupled with nearly broke Western governments, which means that there is very little stimulus available. This forced age of austerity is actually a good thing, but that doesn’t mean it isn’t going to hurt. As an equity investor, you have to roll with the times and, right now, times are slow.
As I wrote before, event-driven trading is always more pronounced during an earnings season. However, we’re not in a bull market for stocks; therefore, the trading gains will be less robust. This season, I’d be looking to add some dividend-paying large-caps to any equity portfolio. I do believe that institutional investors will continue to focus their investing on higher yield securities, because there just isn’t the kind of growth in the economy to generate meaningful capital gains. Accordingly, the flow of money should favor Dow stocks.
Every investor wants to buy low and sell high, but that’s not always possible. It’s a big marketplace out there and there is a lot of money chasing the best returns—be it capital gains or income. That’s why a stock like that of PepsiCo, Inc. (NYSE/PEP) is difficult to purchase at a discount. With a proven track record of good management and wealth creation for shareholders, the stock isn’t down very often for long. When it comes to these kinds of stocks, you usually don’t have the opportunity to wait for them to experience cyclical lows; so, if they have a good quarter, a long-term investor certainly can consider a new position.
Especially in this kind of economy where business is slow, I think it pays to consider those stocks that have already been the best performers over the last 12 months. They’ve proven that they can weather the storm; so, as the economy slowly gets better, these “best of breed” type of companies can accelerate their earnings.
Without question, investment risk is high for new positions in the stock market right now. There are a lot of unknowns out there and the trading action reflects this. These risks aren’t just about a company not meeting consensus expectations; they are about confidence in all capital markets. I think second-quarter numbers will be solid, but that doesn’t mean that share prices will accelerate very much.