The Trend Is Your Friend, Even with a Lackluster Economy

I think every institutional investor in the marketplace is looking at the current state of things and buying stocks anyway. Why? Because there’s nothing else to do. Warren Buffett is correct in that the potential return from earnings and dividends from large corporations is greater than the less risky, but lower yielding returns from bonds or cash.

Any corporate or economic news that’s “better than expected” typically gets a fond reception from investors, but, in this environment, you might as well be a buyer of stocks even knowing that the economy could stagnate throughout 2011.

There is value in the current equity market, but not a lot of it. I think investors with new money would likely do better buying high in this market, with the goal of selling higher. Buying low right now isn’t as likely to be rewarded due to the structural problems facing the economy (this excludes the speculative end of the equity market). General Electric Company (NYSE/GE) is a stock that comes to mind in this case. It’s tough to see this industry giant taking off on the stock market. But companies like E.I. du Pont de Nemours (NYSE/DD) or Caterpillar Inc. (NYSE/CAT) have proven themselves to be strong wealth creators this year due to their growing operations in Asia.

It’s not too surprising to see big companies reporting solid earnings for the third quarter. Large corporations can go a long time with strict controls on expenses in order to bolster their earnings. The key in my mind this earnings season is revenue growth. Only with solid growth in revenues can companies be more able to grow their earnings in 2011. The good news so far this earnings season is that we are seeing this revenue growth by the big industry giants. This is a good sign for 2011.

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Everyone who is buying stocks in this market is worried about next year. Investors are fully aware that the Federal Reserve is running out of options to stimulate the economy. If the economy is only sputtering along right now with the current low rates of interest, then how can things accelerate after the central bank buys a bunch of Treasuries in the fourth quarter? At the end of the day, there isn’t much more that can be done on the monetary policy front.

This is the big worry that investors have, but they’re buying stocks anyway, because there’s nowhere else to put their money. The trend is your friend in this market.