It looks like the old investor adage “go away in May” is going to play itself out once again. It may not be until the fourth quarter that stocks can find a new uptrend, as the economy needs more time to find its footing. What’s happening now in the equity market is a reckoning among investors’ expectations. It’s not really about share prices. The time horizon for decent investment returns from stocks is expanding and the actual amount of those expected returns in shrinking. The market right now is about declining prospects for stocks and it’s reflected in the S&P 500 Index being below the 1,300 mark.
The next major support level for this broad market index is 1,250. It seems likely to me that stock prices will drift downward to create that level over the next three weeks. Stock market malaise could be with us for the entire third quarter, as expectations continue to be revised.
We still have to remember, however, that stocks have had a great run since 2009 and they haven’t really experienced any major correction since then. While investor expectations are being adjusted, it does make it easier for the broader market to accelerate when the economy and corporate earnings turn upward. My guess is that this won’t happen until the fourth quarter this year.
The best buys in this market right now continue to be with large-cap, dividend paying companies. At the very least, a decent handful of these kinds of stocks should be on investors’ radar screens. The market isn’t finished going down as yet, but barring any major shocks to the system (like a Greek debt default), I expect stock prices to tread water for a while. With all the current information, getting some large-cap, dividend equity investments before the fourth quarter seems to me like a decent strategy.
The price of oil remains a good proxy for the short-term trading action in stocks. Longer-term, a weaker oil price will have a direct stimulative effect on the economy. As for gold, this is an investment theme with staying power; however, the near-term trading action seems bent on going lower. This is natural, as investors want to unwind the trade after gold (and silver) has hit record price highs. There’s still lots of room for gold exposure in an equity portfolio today. There’s too much investment risk and inflationary risk in the global economy to do without it.
The next quarter or so should be a good time to consider a high-dividend-paying oil and gas investment. These stocks have corrected with the spot price of oil and are quickly becoming attractively priced. If OPEC increases its production like it says it wants to do over the near term, oil price softness will present a good entry point before the economy accelerates.