Posted on Monday, October 22nd, 2012 | In Market Commentary
One of my biggest concerns about the stock market in recent history has been the lack of confirmation from the Dow Jones Transportation Index. This index hasn’t done a thing in the last five years, and even though it has recovered somewhat since the beginning of October, it has been in a slow, but definable, downtrend since February. I can see why some technology stocks hit new highs this summer, and I can understand the stock market’s reasonable valuation given current earnings, but the lack of uptrend among transportation stocks is telling. We’re not in a bull market, that’s for sure—just a Federal Reserve-induced price recovery—a recovery that, to me, looks like it’s almost over.
I don’t want to be bearish about the stock market, but I’m certainly becoming less enthusiastic about the ability of large corporations to generate meaningful earnings growth going into 2013. I mean the writing is on the wall—so many blue chips are now coming up short on revenues, and you know that earnings are going to follow right behind. There is economic growth out there; some industries are doing better than others. But with the eurozone in no-growth mode and Japan in a similar state, seven-percent gross domestic product (GDP) growth from China isn’t enough to keep things going. Again, I repeat my view—don’t buy blue chips right now; they should be a lot cheaper early next year.
I’ve actually been amazed how well so many stocks have done over the last 12 months; and dividends have been going up. For the long-term stock market investor with established positions, your only friend over the next year or so will be dividends and gold. Reinvested dividends and share buybacks are proven wealth-creators, even when earnings growth is flat. But the stock market has already gone up in anticipation of current fundamentals; all the good news is priced in.
If there is one company with operations representative of the current state of the stock market, corporate earnings, and the future, it’s E.I. du Pont de Nemours and Company (NYSE/DD). This blue chip has mostly led the action in the broader stock market, peaking before the market does and recovering with greater fervor. E.I. du Pont is likely to grow its earnings in 2013, but expectations for revenue growth are flat. The stock had a good start to 2012, but it started breaking down in May and hasn’t quite recovered. E.I. du Pont has trailed the S&P 500 over the last six months and, in my mind, its business conditions more accurately represent the current of state of things than the stock market has bet on. E.I. du Pont’s near-term stock chart is below.
Chart courtesy of www.StockCharts.com
Recent earnings results from General Electric Company (NYSE/GE) and Honeywell International Inc. (NYSE/HON) were decent, but they basically met expectations; the companies also tightened their fourth-quarter visibility. (See “Is The Stock Market Where It Should Be After QE3?”) All the big companies are saying that the operation environment is challenging, but most still expect earnings growth in 2013; and combined with dividends, this is an environment in which the sky isn’t falling.
I’m extremely cautious on the near-term outlook for the stock market. While third-quarter earnings aren’t bad, they’re not great either, and it will be difficult for the stock market to advance without some new catalyst.
About Michael Lombardi (http://www.profitconfidential.com)
Michael bought his first stock when he was 17 years old. He quickly saw $2,000 of savings from summer jobs turn into $1,000. Determined not to lose money again on a stock, Michael started researching the market intensely, reading every book he could find on the topic and taking every course he could afford. It didn’t take long for Michael to start making money with stocks, and that led Michael to launch a newsletter on the stock market. Today, Michael only employs the top market analysts and editors. Some of our recommendations have posted gains in excess of 500%! Michael has authored and published over one thousand articles on investment and money management. Along the way to building Lombardi Publishing Corporation, now with over one million customers in 141 countries, Michael became an active investor in real estate, art, precious metals and various businesses. Readers of the daily Profit Confidential e-letter are offered the benefit of the expertise Michael has gained in these sectors. Michael believes in successful stock picking as an important wealth accumulation tool. Married with two children, Michael received his Chartered Financial Planner designation from the Financial Planners Standards Council of Canada and his MBA from the Graduate Business School, Heriot-Watt University, Edinburgh, Scotland.