Rise in Financials a Good Sign for the Broader Market?

Financials Supporting Bullish Stock Market SustainableThis stock market continues to show material resilience as financials have turned a bit and are helping the S&P 500 index.

Wells Fargo & Company (WFC) just hit a new record-high on the stock market with a forward price-to-earnings ratio of just under 12, offering a 2.8% current dividend yield.

Most of the big banks have actually been in a downtrend in recent months, including Bank of America Corporation (BAC), Citigroup Inc. (C), and JPMorgan Chase & Co. (JPM). Wells Fargo is the exception; the position has doubled in value since November of 2011.

Also coming back from a recent share price downtrend are the credit card companies. Visa Inc. (V), MasterCard Incorporated (MA), Discover Financial Services (DFS), and American Express Company (AXP) have done a good job bouncing off their stock market retrenchment in March and April.

Having the financials moving again is bullish and good for the broader stock market. Institutional investors are definitely willing to buy stocks if the news isn’t too bad.

In a very low interest rate environment, investors are still rewarding share buybacks, increases to dividends, and quarterly “outperformance.” It is, of course, continued short-term thinking. A sustainable new business cycle in the U.S. economy is only possible if corporations unleash some of their cash hoard and make real investments in their businesses.

I suspect this will happen in 2015, especially if the slight momentum in the U.S. economy can continue with relative stability from policymakers and geopolitical events (to the extent that this is possible).

Ever since the financial crisis, the stock market crash, and the Great Recession, corporations have been extremely unwilling to step out of their safety zone, keeping shareholders happy with the usual enticements but not willing to stick out their necks with new business plans.

Businesses like certainty. In the absence of it, companies—especially large multinational corporations—tend to hoard their assets as management waits for the storm to blow over.

But getting back to the stock market, countless blue chips are now back, pushing their highs since the consolidation that started at the beginning of the year. And perhaps this is how it’s going to be. No correction; just periods of price consolidation.

3M Company (MMM) is a favorite of mine for long-term investors. The position has come back solidly after treading water since January. (See “Top Stocks Poised for More Gains in Slow-Growth Market?”)

The recent stock market price recovery action, which is also occurring in a number of other blue chips, suggests that the investor sentiment is improving.

With revenue growth among blue chips expected to be in the low single-digits this year and earnings-per-share growth in the high single-digit range, two trends should be prevalent going into 2015: more mergers and acquisitions, and higher dividends.

This stock market can finish higher on the year without any big surprises. And this is still with the reasonable expectation that stocks should experience a material correction considering where they’ve come from.

All in all, this stock market is a hold. Blue chips should be able to tick higher, especially in the fourth quarter. Their recent price recovery from the first-quarter sell-off is a short-term positive signal.