In this market, the best-performing stocks are large-cap, dividend-paying stocks whose businesses have been around for a very long time. The laggard is the technology sector…and you can see this in the underperformance of the NASDAQ compared to the Dow. While it may seem surprising, there’s absolutely nothing unusual with a company like PepsiCo, Inc. (NYSE/PEP) trading only three points away from its 52-week high and yielding three percent, while Cisco Systems, Inc. (NASDAQ/CSCO) trades 11 points down from its 52-week high and yields 1.6%. This is representative of the current economy and the maturity of the current business cycle. For me, I’d rather own PEP and CSCO any day of the week.
Stock prices are still going to bounce around until second-quarter earnings season begins. The sugarcoating news from Europe about the Greek debt situation is designed to appease global investors, but I’d bet that the issue will come back to haunt the marketplace in a few weeks.
It makes me think a lot about the age of austerity and how much it’s required, both at the individual level and (especially) at the government level. Everything needs a good belt-tightening—some short-term pain for some long-term gain. It’s not a choice course of action for politicians, but we’re at a critical juncture in the amount of debt that the global marketplace can handle.
In some way, perhaps this is why a stock like PepsiCo will do better than a Cisco. Customers can afford to purchase soda and snacks, but some will choose to delay major IT upgrades. It is the age of austerity and it is affecting growth. Now all we have to do is get over this fact and roll with what the marketplace offers.
The only reason that great companies like Caterpillar Inc. (NYSE/CAT) and E.I. du Pont de Nemours and Company (NYSE/DD) have been excellent performers on the stock market is the growth they’re experiencing in the BRIC (Brazil, Russia, India and China) countries. Without the contribution from emerging markets, their corporate earnings would be a lot less.
So, in an age of slow economic growth and belt-tightening in mature economies, one key to outperformance lies in owning businesses that are well-established in emerging markets. A global food and snack company like PepsiCo fits the bill as far as I’m concerned.
I don’t know where the stock market is going to go over the next few years. I’d guess that the right shoulder formation of the S&P 500 Index will get formed. After that, all bets are off unless mature economies like the U.S. and others create a new set of fundamentals that are focused on fiscal responsibility and innovation. The economy could experience a revolution in alternative energy, but policy can’t help create it if there are not enough real dollars in the piggy bank.