A Reality We Have to Deal With

Ahead of the Street Column, by Mitchell Clark, B. Comm.

The stock market is definitely churning and leadership among the Dow, S&P and NASDAQ keeps changing erratically. It’s going to be a tough second half, because, up to very recently, the market’s been ignoring the terrible employment figures. In fact, the market’s been expecting the bad numbers and looking past them.

I just don’t see how you can have a sustained rally in stocks when the unemployment rate keeps rising. Turning this ship around is going to take years and so might the stock market’s recovery.

I say this knowing the true nature of capital markets. Investors aren’t interested in people; they’re interested in money and the stock market can certainly reaccelerate if second-quarter earnings come in strong. As I’ve written before, big corporations have a lot of flexibility in recessions. It’s actually quite easy to shut down production and lay off workers when revenues slow. Pick a random handful of Dow stocks and I bet you’ll see that most of those companies have already initiated cost controls and have shed employees. This is how earnings stay strong when top-line growth does not. This is how big companies keep paying their dividends when times are tough.

I’ve been spending a lot more time in recent months looking for attractive large-cap companies that have a track record of rising dividend payments to stockholders. What I’ve found is quite a substantial list of very good companies that have proven themselves through the test of time. While I certainly like the speculative prospects of U.S.-listed Chinese stocks, I’m also now very interested in solid, dividend-paying large-caps. I do believe that now is actually quite an opportune time to be building a large-cap portfolio that offers income, relative stability, and earnings power over the long term. As is always the case, with a bear market in stocks come higher yields for new investors.

Anyone can make bold predictions about their long-run expectations for the future, but I don’t think you can make a reasoned forecast for how things are going to turn out this time around. That applies to the economy and the stock market. The future is pretty cloudy, because we have huge government deficits, rising unemployment, lower consumer spending, and the prospect of much higher inflation down the road. It isn’t doom and gloom. It is a reality that we all have to deal with.