We’re in the lull between earnings seasons and investors have only economic news and geopolitical events to go on. Being an election year, you can bet that policymakers in the U.S. and Europe will be doing everything they can to avoid any crises and/or shocks to global financial markets. Who would want to mess up the stock market’s strong start to the year?
Commensurate with the main stock market averages, a lot of large-cap companies that pay dividends performed extremely well since the beginning of the year. I think this year can produce a positive result in the broader stock market, but, over the near term, it’s fair to expect some consolidation in share prices. We have reasonable valuations among most large-cap companies, but by no means should anyone expect the stock market to begin a new bull market. Business isn’t that good.
Many large-cap companies didn’t give specific guidance for 2012. Instead, a lot of them just said that they expect a “good” year. No doubt, corporate balance sheets continue to get stronger and this is a very positive trend. But this also means that, to a material degree, large-cap companies aren’t spending their bulging cash balances. They aren’t investing much in new plant and equipment, new hiring or training. This is keeping the good health of the corporate economy from trickling down to the Main Street economy. Austerity, it would seem, is just as pervasive among well-heeled corporations as it is with individual consumers.
If there is another recession in 2013/2014, then large-cap companies will be well-positioned to ride it out. Even though we have very low interest rates and the certainty of an extended low interest rate environment, another U.S. recession is a real possibility next year. With economic growth in emerging markets slowing and Europe virtually in recession now, getting gross domestic product (GDP) to accelerate is going to be a very difficult thing to accomplish. That is, of course, until large-cap companies start spending. This is why I’m not particularly bullish on the stock market, even though I think it has a reasonable chance of finishing higher this year. (Are We in a Sucker’s Rally?)
Large-cap companies are sitting on record amounts of cash and debt financing is easy in a low interest rate environment. But this doesn’t mean that share prices won’t be vulnerable if the economy sputters. Like I’ve been writing, I do believe that the main stock market averages will be able to complete the right shoulder formation of the large head-and-shoulders formation that’s been taking place over the last 15 years. But if the economy does teeter with recession next year, then with equal fervor, the stock market is likely to experience a severe price correction. Only in the aftermath of that scenario, with large-cap companies so healthy, would I become really bullish on the U.S. stock market.