The Dow Jones Transportation Average is close to breaking its 50-day simple moving average. This, in itself, is not the end of the world; it did so most recently in April and recovered nicely.
But it is worth keeping an eye on, especially because the stock market is looking so tired right now.
Earnings are still streaming in and are generally okay. But there’s diminishing momentum. If the broader market opens up on positive news, on many days, it’s not able to sustain the gains. This is indicative of a stock market due for a break.
Summer action is typically slower, and while a 10% stock market correction would make it easier to put new money to work, the investing guide should be corporate outlooks—and they are pretty good going into 2015.
With Federal Reserve certainty, which includes diminishing quantitative easing and a very low interest rate environment going into 2015, the stock market is well informed regarding monetary policy.
Balance sheets remain in excellent condition, especially among blue chips, and the NASDAQ Composite is maintaining its leadership relative to the other benchmarks, which resumed about one year ago.
While the stock market has definitely earned a meaningful break, it very well could turn out to be another positive year with high single-digit returns, not including dividends. This is on the back of an exceptionally good year in 2013—a breakout year from what I view as the previous long-run cycle, that being a 12-year recovery period for the stock market.
But with this fundamental backdrop, I still view investment risk as being high and that quality is something that equity investors should be focused on.
Institutional investors are still inclined to buy safer and predictable earnings (with dividends). It will be a while yet because speculative fervor returns.
What there is not currently is consistency in terms of economic data, and there’s no bandwagon to jump on.
The stock market remains a big hold, and it wouldn’t be unwise to cull non-performing positions. A little extra cash in portfolios isn’t a bad idea, considering where stocks were at the beginning of the year.
There is a great deal of collective uncertainty as to whether the U.S. economy can sustain meaningful growth on its own and if Main Street incomes can actually increase after inflation.
I do believe the business cycle is at the beginning of a new long-run trend, but rising incomes for individuals are going to take several years further to begin trickling down from corporate earnings.
In the current environment, there is not a lot of new action to take, specifically regarding new positions in this stock market.
As mentioned, it’s still a time to be focused on quality investment-class equities that pay dividends.
A portfolio of top-quality dividend-paying names in good businesses should continue to produce decent capital gains and rising dividend income going right into 2015. (See “Two Steps to a Solid and Profitable Portfolio.”)