The stock market has done a good job of breaking 1,300 on the S&P 500 Index, but in order for share prices to advance further, really good news is required. So far, corporate earnings are mostly solid and there’s no denying that investor sentiment has improved. But, while the stock market isn’t expensively priced, it is fairly priced and this means that, in order to advance, we need better economic news, stronger corporate earnings, and improving corporate visibility.
It’s been a very good start for the stock market since the beginning of the year, but the same thing happened last year. Share prices advanced solidly, then consolidated, followed by a correction. The similarities to last year are quite striking, with the S&P 500 starting this year and last at almost exactly the same level. Figuring out where the market will go this year is very difficult, but corporate earnings are expected to grow about 10%. For the most part, business seems to be holding up, but it certainly isn’t booming.
Commodity prices also have had a good start to the year, with the spot price of gold up about $100.00 an ounce since the end of 2011. In my view, the price of gold seems poised for a new breakout soon, and I base this on technical analysis and the long-term trend. Gold looks poised to trade in a tight range over the very near term. Like oil, there’s been some safe haven buying in gold in recent weeks due to the geopolitical risks with Iran.
So, for the stock market to continue with its advance, we need continued good corporate earnings and better news on the economy. I’m encouraged lately by the financial results being generated in many sectors within the industrial economy, and other industries like retail and pharmaceuticals. The technology sector is holding its own, but corporate earnings growth for many of the brand-name large-caps isn’t strong enough for a bullish stance within the group.
In this kind of stock market, investors wanting to take on new positions should stick with existing winners. I’m usually a buy-low/sell-high kind of investor, but we’re not in a market that recognizes value. I’d buy dividend-paying large-caps that are making new highs in this stock market. You won’t go wrong following those companies that are generating good corporate earnings and paying a dividend. (See How to Get Outperformance in this Kind of Market.)
We’re not in a bull market, so expectations are low and we can’t forget that investment risk for equities remains high. The bank can’t offer you investment returns that beat the rate of inflation and, with the structural problems facing most of the world’s mature economies, preservation of capital, in my view, is more important than trying to generate above-average returns.
Corporate earnings are good right now, but they have to get better for the stock market to advance. Balance sheets are strong and companies are running lean operations. Any uptick in top-line growth (revenues) will translate right into better corporate earnings. With all the current information, the stock market is appropriately valued. Investment risk remains high.