Current stock market action remains without trend, anticipating earnings season, which is what this market really needs. The choppiness in commodities, currencies, and the stock market is emblematic of an environment of total uncertainty, with both corporations and institutional investors unwilling to make any bold new bets.
Yet for all the volatility and lack of direction, I continue to view the stock market as holding up extremely well. There is hope out there for decent corporate earnings and the ability of the eurozone to better manage its sovereign debt crisis. Institutional investors are just as reticent as individual investors, and you can see this in the stock market. The outperformers continue to be large-cap, higher dividend paying stocks, of which many are trading right at their 52-week highs. Institutional investors are playing it safe and conservative, buying income instead of paying for declining earnings growth. It’s a stock market trend that I think will continue throughout the next 12 months.
The S&P 500 index is now back to its pre-correction trading level, and this is very impressive. (See “Stock Market Correction: Why It’s Limited.”) The recent stock market and commodities correction was really just an emotional, fear-based selloff due to the lack of decisive and cohesive policy action in the eurozone. As usual, geopolitical events require brinkmanship before anything gets done. It gives more and more reason for institutional investors and individuals to keep their investments at home. I’d rather own a railroad stock than the most profitable European conglomerate or the fastest growing Chinese company for the simple reason that investment risk abroad is just too high.
Depending on what corporations say this earnings season, institutional investors are ready to jump on a bandwagon. The stock market is fairly priced, given all the current information, and there are buyers out there waiting for a catalyst to act. I’d really like to see more companies return their excess cash to shareholders in the form of higher dividend payments, and we know that institutional investors will buy shares aggressively in those companies that did. This earnings season, companies don’t have to beat the quarterly consensus number, but institutional investors want to see good visibility for the rest of the year. Without it, I think the stock market will sell off.
Spot oil prices continue to be the barometer for general investor sentiment, and the huge volatility we’ve seen in oil prices reflects global unease. I still think that the U.S. economy is slowly creating a solid foundation for a new upward business cycle, but will have another couple of years of “consolidation” along with Europe and China. Because of this, institutional investors will be more focused on domestic earnings and dividends growth, and therefore, so should individual investors.