Daily Gains Letter

This Stock Market Can Go Higher

By for Daily Gains Letter | Mar 4, 2013

040313_DL_clarkCorporate earnings are still pouring in, largely from smaller companies that take longer to put their financial results together. The numbers continue to be generally good, and if there is a trend, it’s that earnings are beating consensus, but revenues are coming in just slightly short. For the most part, companies are confirming existing earnings guidance for 2013.

In terms of portfolio strategy, I’m still very hesitant about buying this stock market. We’re at five-year highs and general economic conditions are still pretty slow. But there’s one thing I’m not and that’s bearish. The stock market is appropriately valued, considering current earnings and forecasts for a great number of blue chips are for high single-digit growth in revenues and earnings for 2013. Combined with dividends, this should produce another decent year.

While stock market investment risk is high, a lot of risks in global capital markets are actually priced into the stock market, bonds, and currencies. The sovereign debt crisis and economic weakness in the eurozone is still very pronounced, but the market knows this. U.S. fiscal problems and the inability of policymakers to deal with them decisively are priced into this market. Investors are looking beyond the previous trading catalysts and are now focusing (finally) on what corporations are saying about their businesses. Revenues and earnings are now the big catalyst.

The key, leading index for the stock market remains to be the Dow Jones Transportation Average. Its breakout late last year led the broader market to a new upward trend, and many component stocks within the index are doing great. And corporate earnings from this group came in very solid in the fourth quarter of 2012.

dl_0304_image001Chart courtesy of www.StockCharts.com

My best guess for this year is that the stock market will perform quite similarly to 2012, barring any external shocks like war. Therefore, a “sell in May and go away” type of strategy would be appropriate, followed by reacceleration in the stock market at the end of the year.

There is a lot of doom and gloom in the marketplace, especially among individual investors, and a lot of this has to do with the Federal Reserve’s super-easy monetary policy. It is difficult to escape the “what goes up must come down” type of feeling about the value of money and the stock market.

But I’m not bearish at all right now, because corporate earnings tell a different story. The numbers weren’t as flat as I thought they would be last quarter, and earnings forecasts, while conservative, are calling for growth over the coming quarter.

Additionally, corporations are in the best shape they’ve been in years. Cash balances are strong, debt is very affordable, and companies are loath to invest in new plant and equipment. So for employment, the situation isn’t that robust, but for corporations and shareholders, the story is much different.

What the marketplace needs is more certainty—from policymakers, economic data, and the actions of the Federal Reserve. I think we will actually get it, and with more certainty about the future, corporations will begin to invest their huge cash hoards.

The outlook for first-quarter revenue and earnings growth is modest, but decent. The outlook for monetary policy is for more of the same and the outlook for interest rates is stable. These are all the fundamentals we need for a modestly positive stock market this year. A financial Armageddon isn’t around the corner just yet.

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