Daily Gains Letter

Disconnect Between Economy and Wall Street Widening; Time to Weatherproof Your Retirement Portfolio

By for Daily Gains Letter | Apr 5, 2013


The disconnect between the economy and Wall Street just gets wider and wider. And no one seems alarmed. Over the last four years, the Dow Jones Industrial Average and the S&P 500 have roared higher in spite of the fact that the U.S. economy is struggling to avoid a double-dip recession.

For the average American, there is no difference between a bull market and bear market. Unemployment remains high, so too does household debt. Gross domestic product (GDP) remains flat, consumer confidence is down, and housing is still fragile.

What’s keeping the bull market afloat? Not retail investors. If it weren’t for the Federal Reserve and the deep pockets of the well-heeled on Wall Street, the current Dow Jones trajectory might look a little different.

What can bring a bull market to a screeching halt? Usually an overheated economy and sense of overconfidence combined with lower unemployment, an accelerated GDP, and high interest rates. All of these ingredients are lacking in the current climate, leading many pundits to believe the bull market has more than enough room to run.

Still, this is not your average bull market, so the tried and true indicators for growth may not hold water. Many believe the current rally is a creation of the Federal Reserve and its opened-ended quantitative easing. The markets are also moving on thin volumes and low volatility. It wouldn’t take much to spook Wall Street and send the markets reeling.

So what could derail the current bull market? History and economics? Historically, the U.S. experiences an economic slowdown every four to six years. The current bull market is now in its fifth year.

It’s also important to remember that key stock indices like the Dow Jones and the S&P 500 are only as strong as their components. If companies don’t do well, the indices won’t either. And right now, most Americans are not doing well, having entered 2013 with depleted savings and increasing costs on the heels of a devalued dollar. Eventually, economic reality will have to seep into the markets.

Where should investors looking to strengthen their retirement fund turn in times of economic uncertainty? It’s one thing to look for equities that rebound after a market crash—it’s quite another to find resilient ones that could weather a coming storm.

Consumer goods company Altria Group, Inc. (NYSE/MO) has a market cap of $70.0 billion, provides an annual dividend of 5.1%, and is up 21.4% year-over-year. Health care giant Johnson & Johnson (NYSE/JNJ) has a market cap of $229 billion, provides an annual dividend of three percent, and is up 30.6% year-over-year. Finally, there is the small-cap company Indigo Books & Music Inc. (TSX/IDG). The company has a market cap of $288 million, a strong cash position, virtually no long-term debt, and was untouched by the 2008 market crash.

For those looking to increase their asset allocation in equities, it’s important to remember that the market will go up and down, but it’s never failed to recover. That said, instead of running for the sidelines when the markets turn, it might be better to hold tight while the unpredictable herds head for cover. After all, those who held tight in 2008 aren’t worried about finding a good entry point in the stock market today.

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