“Need to Know” Info About the Coming Retrenchment

equity marketThere are lots of companies but very few stocks I like in this stock market, because stocks have already gone up in value so tremendously.

Countless large-caps provided excellent returns this year, and many of them are old brands that still offer meaningful dividend yields. What’s transpired with the equity market this year has been truly amazing and practically, I don’t think the run is over just yet.

Cracker Barrel Old Country Store, Inc. (CBRL) has a 52-week trading range of $60.07 to $118.44 and a forward price-to-earnings (P/E) ratio of 18.46, according to Thomson Reuters. And guess where the stock is now—right at its all-time record high, up approximately 84% (not including dividends) since this time last year. All this from a mature restaurant brand.

Johnson & Johnson (JNJ), one of my key benchmark stocks and the kind of company that’s welcome in any long-term equity market portfolio, has had a really good year. Its capital appreciation is reminiscent of its performance in the late 90s.


Many blue chips trade similarly to Cracker Barrel and Johnson & Johnson: they go through long periods of consolidation providing minimal capital gains, and then they explode in trading action, typically associated with technology stocks. (See “Why I Like This Blue Chip So Much [55th Dividend Increase Just Announced].”)

So with the huge price moves, the case for a major retrenchment/correction/consolidation in the equity market is very solid. But there needs to be a catalyst for this to happen. The equity market is overbought and looking tired, but there is still a strong willingness on the part of institutional investors to buy on the right news.

I don’t think the catalyst for a correction will be corporate-led. Balance sheets continue to grow stronger and, generally speaking, the sense that I got from the last couple of earnings seasons is that business conditions and corporate outlooks are improving going into 2014.

A geopolitical event could certainly be a catalyst for an equity market correction, but this can’t be predicted.

Equity markets have a tendency to require a big reason for a change in trend. The most powerful force in stocks is monetary policy, but the Street already expects quantitative easing to be tapered. While there will be pressure on interest rates by the marketplace, the central bank continues to chime that the Fed funds rate will be staying put for the foreseeable future.

So what’s left is the potential for non-central bank policymakers to act (or not to act) in a manner that wreaks havoc with equity market confidence once again. The political stalemate regarding the debt ceiling is a perfect example.

Given current information, I think the next major retrenchment in the equity market will be a buying opportunity, and I’m still of the view that investors can stick to the market’s existing winners in large-caps. The big, brand-name companies have the pricing power and economies of scale to accelerate earnings and dividend payments quickly on any uptick in business conditions.