The stock market has certainly proved that investors can be big buyers of shares, but in this market, a catalyst is required. Dividend yields, corporate earnings, technical analysis and even insider purchases are not enough to motive buyers in this market. The stock market’s trading action today is still based on confidence and this is the major catalyst that institutional investors require in order to step up to the plate.
Many stocks in the Dow Jones Industrial Average continue to outperform the rest of the stock market and institutional investors have been buying yield in the absence of capital market certainty. Some of the best stocks this year have been global large-cap companies that are paying higher rates of dividends to shareholders. With the two major stock market buyers being institutional investors and large-cap companies themselves, we can expect more share buybacks and an increase in dividends throughout 2012 (see Dividends and Growth—the Two Go Hand in Hand in this Business Cycle). There’s just no other place for institutional investors or large corporations to put their cash. They’re not going to load up on inventory or on new employees.
So my near-term outlook for the stock market is baby-step, positive trading action, with share prices going from one small trading range to another. Anything is possible in this market of course, but even institutional investors aren’t expecting to revise their earnings outlook higher in 2012. The prospect of a recession still lingers and then there’s the sovereign debt issue, which is still a major, cascading risk to currencies and the stock market.
Because the end of the year is quickly approaching, a lot of institutional investors will be looking to pad their portfolios with the year’s stock market outperformers. This trend has been going on for years now and you can see it in the trading action. This is why we’re a little more likely to experience positive trading action in the stock market right up until the end of year. Institutional investors have always been the biggest bandwagon traders of them all.
I say this with a grain of salt, because stock market investment risk remains very high at this time. A couple of positive trading days do not make a bull market. And we can’t forget that, despite eurozone austerity measures, sovereign debt in these countries is still going up and is expected to keep going up for the next several years. The purported fix for the sovereign debt problem has so far been an exercise in political posturing. And culpability for political rather than economic solutions certainly lies with global institutional investors who own a lot of eurozone sovereign debt. They don’t really care about austerity measures and the three-to-five-year outlook; these institutional investors (mostly big banks owning lots of eurozone sovereign bonds) care about saving their existing portfolios now. That’s why there is all this political pressure for short-term solutions, rather than economic solutions to reduce debt to GDP levels.
This is the marketplace we’re in. The stock market is recovering from a short-term, oversold condition. Institutional investors in Europe will be looking to save their bond portfolios and domestic investors will be looking to pad their equity holdings with the year’s best stocks. It isn’t much of an outlook, but it’s the reality that exists.