How the Markets Will Close Out 2014

Markets Will Close Out 2014Credit card companies are some of the best indicators in the global economy. Visa Inc. (V) just reported a pretty decent quarter. While earnings were down comparatively due to a one-time charge, adjusted earnings handily beat consensus.

The company’s fiscal fourth quarter came in solid, with growth of 10% on a constant dollar basis to $3.2 billion compared to the same quarter last year.

Recently, the company increased its quarterly dividend 20%, and a new $5.0-billion share repurchase program has now been authorized.

Management estimates that its upcoming fiscal 2015 will produce revenue growth in the low double-digits and diluted earnings-per-share (EPS) growth in the mid-teens, which is very solid.

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Visa’s share price really hasn’t done anything for the last 12 months. But this is on the back of tremendous capital appreciation in 2012 and 2013.

This stock market certainly seems trendless as of late. Investors are taking in corporate earnings news, but not doing too much with it.

The earnings numbers from many large-caps and conglomerates are pretty solid. But this market is tired out and the near-term action seems muted.

September and October are often difficult months for stocks and it’s unclear as to why. But going by the earnings results we’re getting and the forecasts that corporations are providing, I think it’s reasonable to expect a good fourth quarter—barring any shocks.

The marketplace knows that the Federal Reserve is going to initiate a new upward cycle in interest rates. It also knows that the central bank has proven to be highly accommodative to equities in recent history and deflationary indicators will increase the duration of when rates start going up, which will be of more concern in 2015.

The recent sell-off in the stock market was nothing more than that. It was just a small price retrenchment due to oil prices and the terrible health scares regarding the Ebola virus.

It’s my view that we are in a secular bull market, which began at the start of last year with the stock market’s stunning breakout. The previous cycle was a long-lived recovery market from the technology bubble that burst and the financial crisis that almost took down the entire global financial system.

For equity investors, what’s important going forward is to avoid all the distractions in the marketplace and focus on the most material news going—what businesses are saying about their operations.

Clearly, currency translation is shaving a percentage point or two off corporate earnings, and this is the expectation in the fourth quarter as well. (See “Why This Company Is a Consistent Winner for Investors.”)

Generally, companies are saying that domestic operations are modestly improving. There is the expectation that dividends will continue to be increased and strong share repurchases will continue.

This stock market is fully priced, but earnings are catching up to share prices. With a near-term monetary policy outlook that’s stable, I see 2014 closing out with a modest gain.