Three Facts that Will Stall the Market's Momentum

Gather together small business owners, home owners and heads of families and ask them if they’re concerned about their financial position and the answer would be a deafening yes. This is in stark contrast to the relentlessly rising Wall Street.

For six months consecutive, the U.S. stock markets have steadily climbed, with a few minor interruptions, to gain almost 50% from the March lows. The S&P 500 now trades at a hair under 20 times 2009 earnings estimates and yields 2.5%. The risk free yield of the ten year treasury offers close to 4%. Buyers of the S&P 500 at the March lows were locking in a dividend yield that exceeded the ten year treasury, an opportunity which investors have not seen in more than 50 years. (In my March 8, 2009 article, http://seekingalpha.com/article/124752-has-irrational-apathy-unduly-depressed-asset-prices, I recommended buying the broad market using SPY.)

Stock markets seem to have enough bullish momentum to propel them higher. But profits will be short lived and current investor confidence will be strained by declining markets sometime this fall. At least three economic facts will stall the upward momentum:

1. An economic recovery based on artificial government stimulus is not sustainable.
2. Corporations are beating depressed earnings expectations by cutting costs (i.e. fewer employees) not growing revenue. Future earnings growth will be difficult to achieve.
3. Sluggish income growth and rising unemployment will continue to hamper the consumer’s habit to spend. The Fed’s artificially low interest rates will rescue the indebted consumer over the short term but may just create another ticking time bomb. Even with programs designed to induce consumer spending, such as the “cash for clunkers” program, retail sales still fell 0.1% in July.

So what is the serious investor to do? Own solid dividend paying companies which have proven to hold up better in declining markets. The following defensive stocks will grow their earnings in 2010, pay better than a 3% dividend and trade at an earnings multiple far below the S&P 500: AT&T (T), Abbott Labs (ABT), PepsiCo (PEP), Procter and Gamble (PG). In addition, cash pays very little now but U.S. Treasury bonds available through iShares TLT pay more than 4%.

Author’s Disclosure: S&P 500 @ 1100; and author owns shares of T, ABT, PEP, PG and TLT.

Disclosure: Hillbent.com, Inc. or its affiliates may own positions in the equities mentioned in our reports. We do not receive any compensation from any of the companies covered in our reports.

Comments

[ilovesum:]

no doubt wall street is rosier than main street , another head fake ?
how does china report the only postive gdp in the world ? is that that
decoupling thing ?

Aug 18 02:21 PM

[BMCquebec:]

China has also seen their economy slow but from a significantly higher rate, ~11% down to ~7% vs US from ~3% to zero or negative. Envesting in emerging markets offers diversification not necessarily for the decoupling but for the added volatility. China reached a bear market decline yesterday while the US market has just modestely declined.

Natural resource reach countries such as Canada tend to offer better alternative exposure to US markets.





On Aug 18 02:21 PM ilovesum wrote:

> no doubt wall street is rosier than main street , another head fake
> ?
> how does china report the only postive gdp in the world ? is that
> that
> decoupling thing ?

Aug 19 08:32 AM

[jerrydd:]

As soon as the economy recovers, then $150-200/bbl oil will put it right back into recession.

I expect 7-10 yrs of rather slow growth unless we get off imported oil and into stable RE and NG.

Next we need the US's fiscal house in order which means tax increases to balance the budget with health care reform.

Sorry rich but you made the money off this last 8 yrs so you are going to have to pony up. Consider it an investment as you can make far more money in a good economy than in this one, easily making up any tax increase.

Oil wars, trade deficits from oil, Persian Gulf military costs will break us if we don't get off imported oil. The beauty of this is Iran, Russia, Oil dictators and terrorist will pay most of the oil tax from lower oil prices, starving them.

iNow think of the jobs made by getting off oil, by the $1T/yr we'll save from buying oversea oil, instead buying US energy, labor instead. Isn't that stimulus? Now consider RE will stabilize energy prices to just above present cost and getting off imported oil is not just a good idea, but a very profitable one.

Aug 19 10:37 AM

[ed233:]

You forgot to mention a fourth reason which I believe to be most important. The credit system is broken in America and as long as Mr. Obama is insistent upon introducing policies that the Ameriacan economy cannot afford such as health reform, cap and trade then you'll only see a stalled economy mired in bankruptcy. The US economy will not be healthy until the US dollar returns to respectable levels as a result of sustainable debt levels. LOL Looking after your money.

Aug 22 09:01 PM