Well, there’s only one way to say this—the numbers so far haven’t been that great. So far this earnings season, it’s been a mixed bag of mostly underperformance, and this isn’t a good sign for the future. It’s not that there hasn’t been decent growth in revenues and earnings as of yet; only that most big companies that have reported haven’t met consensus estimates. It’s difficult to imagine a rising equity market when big companies can’t beat the Street.
It’s still early days and investor sentiment has proven to be unpredictable. The broader market could still tick higher even if the numbers continue to underperform. Just like the economy, different industry groups within the entire stock market are experiencing different rates of recovery. Currently, it’s looking like the banking sector isn’t going to deliver the kind of growth that investors are looking for. For every sector that’s fumbling, however, there’s another that’s doing much better (the railroad companies, for example). So, I think it’s fair to conclude that this mixed bag of economic recovery is here to stay for a while.
The whole situation makes me more convinced that investors taking on new positions need to be focused on which businesses will benefit the most from inflation. The domestic economy on the whole just doesn’t seem strong enough yet to provide the growth necessary to warrant investing in stocks. Therefore, the only way to get any kind of meaningful growth from your equity investments is to have them focused on assets that benefit from price inflation. This is the key for outperformance this decade—we’re in an age of austerity, a falling dollar, and global price inflation.
The current value of most commodities can be considered high. But, while the rate of core inflation for consumers seems low, rising raw material costs will eventually make it through virtually all sectors of the economy. A rising oil price is always the first to be translated directly to consumers. The price of gasoline moves so quickly, because the big oil companies make it this way. But with precious metals (used in manufacturing and jewelry) and agricultural commodities, it takes a lot longer for higher raw material costs to be passed down to consumers. We’re almost at the point now where large corporations won’t be able to hold these costs much longer without having to pass them through to customers. When this happens (should be this year), consumers will really start to feel it and this could have a very detrimental effect on corporate earnings.
Stock picking to play a global inflationary trend is actually quite easy. Right now, we have all kinds of gold stocks and silver stocks that are doing well and it’s not just because of any one factor—global investors see the investment risk inherent in the U.S. and European economies (and their currencies). They are increasingly looking for a store of value that they can use to outperform. The price of gold is currently trading close to $1,500 an ounce. I don’t find it difficult at all to imagine $2,000 an ounce in the not-too-distant future.