If the economic data don’t start improving, then even the best-managed companies are going to have a difficult time growing their earnings in future quarters. It’s a fine line the economy is on right now and the future is rather unclear. That’s why the main stock market indices aren’t doing anything; there just isn’t enough positive economic news for a meaningful upside trend to develop. This is why we’ve been seeing institutional investors buying dividend-paying stocks lately. There’s nowhere else to generate any return on investment.
By the end of the third quarter this year, we’ll know whether the economy’s going to slip back into recession. It may not happen technically, but gross domestic product (GDP) could drop to one percent on an annualized basis, which is pretty darned slow. We could even get a period of slow economic growth for the next several years, as the global economy deals with high levels of government debt and spending, combined with a slow recovery in the housing market. In a way, you could argue that the Federal Reserve has done a good job of “managing” the U.S. economy in that the recent recession could have been a lot worse. Going forward, there isn’t much in the way of policy tools left to stimulate the economy. The private sector is on its own (as it should be).
Stock market advice in this environment is less useful with the broader market in consolidation. Long-term equity investors can buy large-cap stocks with solid dividends. Speculators will have a much more difficult time generating capital gains without the help of a rising market. I still view the current environment as being a bear market for stocks. That’s why investing in gold is such a good idea. The spot price moves opposite the U.S. dollar and, for a lot of institutional investors, gold is becoming somewhat of a currency itself. This is especially the case with all the sovereign debt troubles in Europe. If the euro currency were to come apart, the price of gold would soar.
The economic news lately hasn’t been very good and it’s a signal that a good portion of the economy isn’t growing very much at all. There are some sectors with good fundamentals and large companies that are able to increase their prices without affecting demand. But, at the consumer level (employment, retail and housing prices), the picture is much different. At the industrial level, the recovery continues. At the retail level, stagnation remains.
So, I repeat my view that equity investors don’t need to be in any rush to take action at this particular point in time. The market should continue to tread water until we get into second-quarter earnings season in just over a month. The fact that the S&P 500 Index is still well above 1,300 is a positive sign for equities.