Even though the Dow Jones Industrials just hit their best level since 2007, the Dow Jones Transportation Index began to appreciate with the other major indices only in the last week—and this is with buoyant oil prices. It all leads me to believe that the stock market is technically overbought and almost a little ahead of economic fundamentals. (See “Stock Market Investor Sentiment Drops Again…Why?”)
However, I can’t argue with the momentum in the Dow Jones Industrials. Institutional investors continue to snap up dividend paying blue chips with fervor. There are two things the stock market needs for this mini bull market to continue until the end of the year: one, large-cap technology benchmark stocks must not break down; and two, the Dow Jones Transportation Index has to make up some lost ground. The risk of a stock market correction rises significantly if any of these two factors don’t occur.
With the Federal Open Market Committee (FOMC) meeting upon us, anything could happen with the stock market. We’ve seen the Dow Jones Industrials, the NASDAQ Composite, and the S&P 500 Index move strongly higher in anticipation of new stimulus from the FOMC; and most often, the stock market sells on the news. But things are a little wacky this year, and even though I think the stock market is in the process of topping out, a third round of quantitative easing (QE3) could send shares soaring anyway. It’s all because the stock market isn’t expensively priced and investors have no other place to put their money to beat the rate of inflation. Dividends are the only game in town in a slow-growth environment.
Although stock market volume has been very low in recent history, the Dow Jones Industrials have done exceedingly well since the market hit its low in March of 2009. The Dow Jones Industrials have basically doubled since then (not including dividends), which is pretty impressive for three and a half years.
One component of the Dow Jones Industrials that you might not think of as “doing well” is The Walt Disney Company (NYSE/DIS). The creators of Mickey Mouse just hit an all-time new record high on the stock market. The stock is currently trading at a price-to-earnings (P/E) ratio of 17, with a current dividend yield of 1.2%. At the beginning of the year, Walt Disney Co. was $37.00 a share; now it’s $51.00, with Wall Street analysts raising its earnings outlook for next year.
Another Dow Jones component that has done fantastic on the stock market over the last 12 months is The Home Depot, Inc. (NYSE/HD). This stock is very close to hitting its all-time record high, which was set back in 2000; it’s currently trading right close to its 52-week high of $57.89. Twelve months ago, this Dow Jones component stock was trading for $32.00. The Home Depot is currently trading for about 20 times its current earnings with a two-percent dividend yield.
It’s fair to say that things will continue to be wacky on the stock market this year. Whatever happens with the FOMC, dividends remain key in a slow-growth environment.