Daily Gains Letter

Why You Don’t Need to Worry About the Sky Falling on the Stock Market

By for Daily Gains Letter | Feb 25, 2013

















250213_DL_clarkThere’s no need to worry about the stock market’s gyrations after the Federal Reserve said it was time to start thinking about ending quantitative easing. No other Federal Reserve in history has been more willing to accommodate Wall Street, so help through monetary policy won’t be going away anytime soon.

The stock market is appropriately valued, given current earnings, and it’s bouncing around its five-year highs on low trading volume, due to the uncertainty of economic growth going forward. In my opinion, the key is to lend less weight to the overall stock market and more to what corporations are saying about their businesses. While there is quite a bit of disparity among corporations and industries, 2012 fourth-quarter earnings season was generally good.

A lot of large-cap, dividend paying corporations said that they expect high single-digit growth this year, which including dividends, should result in another solid, low double-digit rate of return for investors. Adding to the story is the fact that corporations are not expensively priced on the stock market. In fact, many are trading quite a bit below their historical valuations.

So, while investment risk is high and trading volume on the stock market is low, the outlook from corporations is pretty much the same.

Consider The Procter & Gamble Company (NYSE/PG), for example. Procter & Gamble is one of several blue chip corporations in the consumer products industry. In its latest quarter, ended December 31, 2012, the company increased its core earnings per share by 12% to $1.22. The company also raised its 2013 fiscal year earnings guidance and increased its share buyback program. The company’s stock chart is below:

dl_02252013-image001Chart courtesy of www.StockCharts.com

 

Procter & Gamble has been paying a quarterly dividend for 122 consecutive years, and it has actually increased its dividends for 56 consecutive years. So while the sky might be falling for the stock market, it isn’t for a company like Procter & Gamble.

Today, larger U.S. corporations are in the best shape they’ve ever been, with strong balance sheets and lots of cash in the bank. Borrowing costs remain low, dividends are going up, and share buybacks are on the rise. While corporations aren’t saying that business conditions are fantastic, they’re not saying that business is getting worse either.

The stock market is a system that is based on fear and greed. On any given day, there is no “right” value for a company, only what speculators and investors are willing to pay. It’s reasonable to assume that the U.S. economy is going to produce much slower gross domestic product (GDP) growth than it has historically, probably for the rest of this decade. Accordingly, stock market investors can’t expect 20% growth from corporations.

The next major price correction in the stock market will be a good time for blue chip investors to take on new positions in those corporations that have solid fundamentals, even in a slow growth environment. The stock market is due for a break, as it’s been moving upward for four straight years. But even with minimal GDP growth, you should still be able to get a high single-digit rate of return on the right corporations. A 10% compounded rate of return doubles your money about every seven years, and this is very much a reasonable expectation in today’s market.

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