I 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 just as effective at generating impressive capital gains as traditional growth stocks. In fact, you can argue that traditional growth stocks don’t really exist anymore, because traditional economic growth isn’t a reality in the age of austerity. Regardless, I think stock market investors need to be very cautious in the current environment and that dividends are an investor’s only friend.
I’m looking for big dividends increases over the next two quarters, not runaway financial growth. Large-cap companies know that if they can’t generate both top- and bottom-line growth, they can keep institutional investors happy with increased dividends. It’s the best way to keep the party going.
Specifically, I’m expecting a dividends boost from the financial sector during first-quarter earnings season. We’ve already seen several announcements related to this. I think we’ll also get more dividends announcements from the technology sector and the industrial sector (like railroads), which are due to increase their payouts to shareholders. Regardless, if corporate visibility is murky, then increased dividends will be the only way to keep investors happy.
American Express Company (NYSE/AXP) announced a big dividend increase and the news sent its shares soaring. American Express is mimicking the S&P 500 Index almost exactly. (See Who’s Buoying up the Stock Market for 2012?) The stock is forming the right shoulder top of a traditional head and shoulders formation. With improved dividend news from large-cap companies, this little bull market can continue. Without it, I think we’ll get some drifting in the stock market throughout the second quarter.