The one thing that companies aren’t doing is hitting their earnings out of the park and this is a problem for a stock market at its high.
Countless companies aren’t reporting material comparable growth in their financials. So there’s no particular reason why stocks should be appreciating in value.
However, it is useful to keep in mind that the equity market is all about one thing—discounting a future stream of earnings. And with a lot of corporate outlooks looking pretty good for 2016, given the current information, I think it’s reasonable to expect trading action in the fourth quarter to improve as investors bet on a more robust 2016.
Stock Market Earnings Reveal Two Very Different Economies
There have been plenty of disappointments this earnings season, but Microsoft Corporation (NASDAQ/MSFT) was a big one: the company wrote off its recent Nokia acquisition.
It’s not as if it’s tough times for large multinationals that continue to have plenty of cash on their books; it’s that it’s difficult for them to achieve meaningful growth comparatively. Currency translation remains a big problem (but the Street knows this, of course, and stocks aren’t really selling off due to this singular factor).
Big companies are therefore still likely to try to keep shareholders happy with dividends and share repurchases. It’s a corporate strategy that’s worked for investors the last several years and I see no reason why large corporations won’t keep doing so in this sluggish market.
Stocks Offering Certainty in a Market at Its High
So oddly, even in what should soon be a rising interest rate environment, dividend-paying stocks offer a lot of relative certainty.
In a rising rate environment, resource-related investments often underperform. While my outlook for gold prices is weak, I do believe that there is opportunity in energy-related securities, with spot oil and natural gas prices in the doldrums.
Certainly not as short-term trades; but rather as longer-term investments that one can build a position in over time.
A company like Kinder Morgan, Inc. (NYSE/KMI) fits the bill perfectly in terms of its diversified assets and businesses related to energy production, storage, and transportation.
Management plans to increase its annual dividend by at least 10% per year until the end of this decade. (See “Oil Prices in Rut: Can Investors Make Any Money?”)
In a stock market at its high, finding things to buy if you’re an investor looking to put money to work in equities is difficult. This is why I do like select energy-related investments that pay dividends.
Given that the energy sector has already corrected on spot prices and business plans have already been rewritten with $50.00-oil, the downside risk is lower than with the market’s existing momentum plays.
Bull Market for Both Stocks & Business Growth?
Getting back to corporate earnings. This is what I call a “maintenance” market for companies. It’s tough to grow sales so earnings are kept afloat by strong cost controls and a lack of new business investment.
If it is a secular bull market for stocks (which I believe it is), it isn’t just yet for business growth.