The only thing that really matters to the stock market is corporate earnings. The numbers are everything, and that’s what equity investors need to be focused on.
I’d be a new buyer of large-cap, dividend paying stocks right now. The market hasn’t pulled back much over the last two years and, every time it has, it’s been a great buying opportunity. The stock market is reasonably valued at its current level and the expectation is for a solid year of corporate profit growth. Job numbers, housing prices, and ISM surveys are all important, but, as the owner of a business, it’s always the bottom line that counts.
Even though I’m advocating that investors with money to spend consider buying stocks right now, I’m not saying that investors should load up on speculative issues. Far from it. Investment risk in the world remains very high. This is mostly due to the sovereign debt issue in Europe, which keeps flaring up every month or so. A lot of big investors over the years have contemplated the end of the euro currency; if it were to happen, the result would be disastrous for capital markets over the short term. It wouldn’t be the end of the world, of course, but financial markets would likely take a huge hit. So, because this risk is present and real, equity investors need to be fairly conservative with their holdings. And, if we are going to experience a period of slow economic growth in the U.S. economy, then investors need to be awfully choosy about which companies they invest in. Ever wonder why a company like Caterpillar Inc. (NYSE/CAT) has been such a powerhouse wealth creator for shareholders just over the last year? It’s because the company is well-diversified in the world’s fastest growing economies.
I think some individual investors have a tendency to forget just how risky stocks are. Putting money into the stock market is taking a gamble—you’re betting on a company’s ability to generate profits, while recognizing that the business cycle exists. Without question, equity securities (which are shares in a company that trade in a secondary market) are 100% risk-capital instruments. Therefore, it pays to have a healthy regard for risk, no matter what the broader market is doing.
Everybody likes a bandwagon. Take gold, for example. The spot price of the commodity has been going up for years now, but it isn’t until the media headlines take hold that a lot of new investors jump in and buy gold or gold stocks. As the old saying goes, once it’s in the newspaper, the story is mostly over. This still rings true today.
Right now, it’s difficult to be a buyer of stocks. The economic data is lackluster and we’re in between earnings seasons. But, it’s often this kind of uncertainty that creates good entry points for new positions. Now is a good time to be considering well-managed, large-cap, dividend-paying stocks. The right large-cap company can beat the best high flyer the market has to offer.