Right now, the stock market is at a very important point. The third quarter is just about to end and another earnings season will begin. In terms of the main stock market indices, they all seem to be at a crossroads, right on the line of either staying where they are, or breaking down further.
It seems highly unlikely that we’ll see the stock market advance in any meaningful way over the near term. There’s no catalyst or good enough news for institutional investors to pile into stocks, even though they have the money to do so. There is selling going on, as evidenced by the main stock market averages, but equally as important is the absence of buyers. Investor confidence is not very strong at all and Wall Street is reflecting the mood on Main Street.
As I’ve written previously, I don’t feel there’s a lot of action to take in this kind of environment if you’re an equity investor looking to do something. Predicting the future of share prices is a fool’s game, but because the broader market is so well valued and the earnings picture is quite decent, I don’t think we’re going to see a total breakdown. Instead, I expect more range-bound trading around current levels.
With current expectations for the economy and the stock market, it’s no wonder that cash balances are bulging at the seams. Of course, I’m not referring to the bank accounts of individuals, but those of corporations that are afraid to invest with such a cloudy future. Someday, all this cash is going to be put to good use, but the fundamentals for the economy will have to improve first, not the other way around. With corporations unwilling to spend on new plant, equipment and workers, it’s fair to expect zero GDP growth for the rest of the year.
There are good buys in this market due to valuations, but you have to have a long time horizon for investment and you have to have dividends in order to beat inflation. Well-managed companies like PepsiCo, Inc. (NYSE/PEP), E.I. du Pont de Nemours (NYSE/DD) and Johnson & Johnson (NYSE/JNJ) are well off their highs and their dividend yields reflect this. Of course, you can’t expect much as an equity investor, because the economic outlook (even internationally) is so mediocre. Your only return on investment in this kind of market might just be the dividend payment and this begs the question: is it worth investing in equities with all the risks out there and the expectation for little capital gains?
The best strategy going forward is all about protecting yourself with assets that outperform in turbulent times. These include cash, gold, some silver, and very carefully selected dividend-paying, blue-chip stocks. Financial markets can and do get carried away with price extremes. In the end, however, prices of securities come to reflect the underlying value of their assets. Right now, the stock market is trading at a level that reflects current expectations for the economy. Until those expectations change, there’s no rush to do anything.