Daily Gains Letter

There’s More Than Meets the Eye with This Bull Market Run

By for Daily Gains Letter |

There’s More Than Meets the Eye with This Bull Market RunU.S. investor confidence was given a shake last Friday when it was announced that first-quarter gross domestic product (GDP) growth came in at 2.5%—a far cry from the predicted three percent expansion. (Source: “Gross Domestic Product, First Quarter 2013 [Advance Estimate],” Bureau of Economic Analysis, April 26, 2013.)

Fear not, the Dow Jones and S&P 500 are still doing well—but are they really? Signs of caution and weakness abound. According to the American Association of Individual Investors, the bulls have cooled and the bears are growling.

According to the most recent survey, the share of bullishness has fallen to 28.3%, down from 52.3% just three months ago. Conversely, bearishness has surged to 38.8%, up sharply from just 24.2% during the third week of January. (Source: “Sentiment Survey Past Results,” American Association of Individual Investors web site, last accessed April 29, 2013.)

Headlines like “Growth Falls Short of Forecasts,” “Weakness Ahead,” “Consumer Sentiment Wanes in April,” “Chevron First-Quarter Profit Down on Weaker Oil Prices,” and “Amazon Slides on Earnings Miss” suggest individual investors may be onto something here.

Seen in isolation, the record highs in the S&P 500 and Dow Jones Industrial Average seem impressive. On the other hand, it’s interesting to note that it took half a decade for the markets to rebound, even after the Federal Reserve dumped trillions of dollars into the financial sector.

I’m not so sure “the markets” are a true representation of the average investor’s involvement in those markets. Or that the record highs are a real vote of investor confidence.

What is interesting to see is which sectors have been performing strongly on the S&P 500. Defensive sectors like consumer staples are up 17% year-to-date and health care is up almost 18%, while utility stocks are up 17%. (Source: “CandleGlance: S&P Sector ETFs,” StockCharts.com, last accessed April 29, 2013.)

At the other end of the spectrum is technology, up one percent year-to-date; industrials, up seven percent; materials, up 1.5%; and energy, up 5.5%. Not surprisingly, the financial sector is up a decent 10% year-to-date and the consumer discretionary sector is up 12.5%.

In the midst of the so-called recovery, investors seem to be more attracted to defensive plays. This is odd, considering defensive stocks are where investors turn to when the economic outlook is grim. Why? Because people need to wash their hair, keep warm, communicate, and stay healthy, regardless of where the economy is headed.

Alas, there are always two sides to an investing coin. While some argue investors are turning to defensive stocks because the outlook is grim—unemployment is high, consumer confidence is down, and personal debt is up—others suggest defensive stocks are the darlings of the S&P 500 because of their healthy and stable dividend yield, an alternative to low-yielding fixed-income securities.

There are dozens of great defensive stocks for investors looking for both dividend growth and price appreciation. Utilities giant Dominion Resources, Inc. (NYSE/D) provides an annual dividend yield of 3.7% and has seen its share price climb 18.1% year-to-date.

Consumer staples provider Johnson & Johnson (NYSE/JNJ) provides an annual dividend yield of 2.9% and is up 20% since the beginning of 2013. Health care company AstraZeneca PLC (NYSE/AZN) pays out an annual dividend of 7.4% and is up 12.5% year-to-date.

Until the sky-high markets find rational stability, defensive stocks could remain the safest bet for investors.

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