Streetwise for Sunday, July 2, 2017
“Forecasts are difficult to make…particularly about the future.” Samuel Goldwyn.
It is summertime once again with the upcoming Fourth of July holiday being the unofficial start of the beach and barbecue season. It is also when everyone asks the same question…will we see a summer rally on Wall Street between July 4th and Labor Day.
Statistically, July is the best month for stock prices in terms of percentage gain. Furthermore, the Dow Jones Industrial Average has rallied during 63 of the past 70 summers. Of course, if you subscribe to the theory that the stock market represents a series of independent events, then a rally has the same statistical probability as no rally.
Yet, there is little doubt that the annual expectation of a summer rally is partially the consequence of the fiction and fantasy that always seems to envelop stock trading. At its worst, the folklore simply contributes to the market’s overall mystique. Yet, long-time observers concede that the stock market does exhibit seasonal tendencies.
Seasonal tendencies aside, the equity markets continue to offer an opportunity to invest in quality companies at reasonable prices. The concern many investors have over a potential major downturn is, in my opinion, unwarranted.
Let me remind you of that Federal Reserve Chair Janet Yellen said recently that she does not believe that there will be another financial crisis in her lifetime. One key reason given was reforms to the banking system since the 2007-09 crash.
Meanwhile, attempting to time a twitchy market is simply not possible. And tethering your portfolio to the indecisiveness of the financial markets is a sucker’s game. Let the news inform you… not dictate your actions.
As opposed as I am to short-term market forecasting, I believe Wall Street has a better than even-money chance to move higher this summer.
No, the current political environment, both nationally and globally, as volatile as it may appear on the surface, does not mean the end of the current bull market that began back in 2009. Our stock market is better able to withstand unfavorable global developments than any other major equity market.
One key reason is that American corporations generate about 40 to 60 percent of their revenues domestically. That compares favorably to the 58 percent for Japanese companies and 49 percent for European companies, according to a report by Morgan Stanley. Moreover, our domestic corporate balance sheets are strong, interest rates are low, and the economy will likely have chalked up a 2.5 to 3.0 percent second quarter expansion. My current projection for third quarter is about 2.5 percent.
If you need a cause for concern consider that just 28 firms are collectively responsible for more than in 2016 half of the total net income reported by companies making up the S&P 500 index. In 2014, 52 companies generated half the overall corporate profit within that index.
Yet, relative to bonds, stocks are certainly more appealing, particularly when compared to the Treasury market. The 10-year note recently traded with a 1.94 percent yield. So, let’s compare that to Johnson & Johnson’s indicated annual dividend yield of 2.57 percent.
In addition, Johnson & Johnson has consistently increased its dividend for 52 consecutive years. And it is one of only two companies with a AAA credit rating.
If the company’s share price rises by just 5 percent, it has already gained 19.98 percent year-to-date (YTD), and you receive a dividend payout of 2.57 percent, you have a total return of 7.57 percent.
When equity yields are higher than treasury yields, it is a bullish indicator for the stock market. That doesn’t mean go out and buy high yielding equities that are not quality names. It means look to the blue-chip names and evaluate their current valuation along with their dividend yield.
I am maintaining my bullish outlook for the second half of 2017. Moreover, there will always be profitable investments available. And as you paddle down the river of life, do not focus on the rocks, but on the opportunities.
Lauren Rudd is a financial writer and columnist. You can write to him at LVERudd@aol.com. Phone calls accepted between 9 AM and 3 PM at (941) 706-3449. For back columns please go to www.RuddReport.com.