All right, time to confess. You know who I’m talking about. That’s right, I mean you.
Despite fierce pressure in early 2009 you held onto your stocks, then bought more, when everyone around you was folding. You made bargain buys and pretty nice profits. And if you bought dividend-growth stocks you locked in some sweet yields for the long run.
But now, with stocks down in January, the long-suffering We-Told-You-So Glee Club, led by that chirping brother-in-law, is tuning up for their long-awaited Redemption Chorus.
“Just like we said, the market’s finally falling,” they warble. "We told you so, all summer long. Here it comes, that’s right, here it finally comes.”
What you need (besides a nice pair of noise-reducing headphones) is some distracting reading material and a few hefty bon mots to toss back at the choir.
So here we go again, half a dozen stellar excuses to stay stubbornly bullish, with links, below, for those who like their distractions deep.
First, market probability casts the January dip as most likely a ho-hum correction.
In a recent PBS television interview, for example, private money manager John Dorfman pointed out that investors should normally expect three or four corrections of 5% to 10% in a year, and that Washington’s tough talk and China’s tightening are good reasons to suspect this is one of them.
Meanwhile, the Wall Street Journal reported the historical chances are about one in four that a 5% dip will turn into a 10% drop, while chances are only about one in ten that it turns into a 20% swoon. The historical studies the Journal reviewed suggested current bull market gains are likely slowing, but not stopping.
Second, although the recent GDP report seemed to disappoint traders (and chronic pessimists), taken with other economic reports it affirmed the economy is probably good enough.
For instance, GDP breakouts showed that gains in capital spending, typically a sign of future hiring according to the Journal, climbed to their highest level in almost four years, while the ISM manufacturing index just hit its highest number since 2004.
The GDP report also divulged that non-automotive consumer spending (which backs out “cash for clunkers”) accelerated in Q4, while the Labor Department reported wages grew at the fastest rate in over a year, and the University of Michigan consumer sentiment survey rose as well.
True, most of the hot Q4 GDP number was from slower inventory reductions. But inventory cycles are a huge part of recession and recovery dynamics, and the current inventory build seems barely underway.
Third: stocks and jobs. Granted, there’s no doubt the job market, especially unemployment, still stinks. In fact, those recent wage gains were rancid by historical standards. But, perversely, that doesn’t mean stocks have to stink too, as both Barron’s and BusinessWeek have pointed out.
Because the truly ugly fact is that low labor costs translate into high corporate profits. For example, a Barron’s article in mid-2009 cited market strategists and statistics showing productivity, compensation cuts and profit leverage all hit historic levels for a recession. Their conclusion: when capital routs labor stocks go up.
It wasn’t the first time it’s happened, and won’t be the last.
Over the past four recessions, the economy has taken progressively longer to gain back lost jobs. Yet the stock market hit new highs in each recovery.
Last time around? BusinessWeek reported in late 2002, a year after that recession ended, that companies still needed to cut payrolls and shut down factories to get earnings up. The result: four years to return to peak employment, and an S&P that doubled from the bottom. And a recent BusinessWeek article says it’s no different this time, as corporations callously wring out labor costs.
Nobody should celebrate this trend. I don’t. But brutal structural changes in the U.S. labor market mean stagnant post-recession employment is the ‘old normal,’ not the new enemy of profits and stock prices.
Fourth, what about that “other shoe” of economic Armageddon, commercial real estate?
I recently sat through a conference call with a Fidelity Investments’ analyst who pointed out that CRE, like unemployment, is a lagging indicator that looks backwards, and if CRE is a disaster in the making, it has been long enough and loud enough in the making that it almost certainly is priced into stocks already.
Fifth, stock market history sides with a second year of gains. Guru market historian Ken Fisher notes in his most recent Forbes column that when a big bear market is followed by a positive year such as 2009, the next year is “stunningly, consistently, overwhelmingly positive.”
We’ll close out with one of the choir’s favorite numbers, the market’s rocket gain from the March 2009 bottom. It’s easy to sing that number off-key.
Veteran value investors like Oakmark Funds’ Bill Nygren perceptively detected the March low as pure panic with no basis in fundamentals, and calculated that a big rally from there was justifiable regardless of economic recovery strength.
Or, as strategist James Paulsen of Wells Capital asserted when the S&P was just breaching 1000 late last summer, "Equities may have lifted off of crisis lows, but a new bull rally based on and driven by a sustained economic recovery has not yet even started.”
So there you have it. Half a dozen stellar excuses to stay stubbornly bullish, all lined up to toss right back at the glee club. (Aim for the brother-in-law.)
And while the choir shifts its repertoire from the yearlong blues ballad that accompanied one of the most magnificent stock market moves in history, take heart, you’re excused from humming along.
But nice headphones or not, a few sour notes will probably break through, perhaps as soon as this Friday’s employment report.
Or perhaps later, when the Fed faces unwinding its stimulus without undoing the recovery. Or maybe as a result of teetering state and municipal finances. Or maybe the deficit, or the dollar, or maybe something else.
Or maybe not.
If any of these notes pound your eardrums like a bad percussion solo, consider rebalancing your assets to keep your portfolio lined up with your long-term goals, and keeping your equity allocation in high quality stocks with growing dividends. Such stocks have a long history of outperforming their benchmarks.
For instance, over the flat nasty market of the past 10 years, diverse dividend-growers like Exxon Mobil (XOM), Johnson & Johnson (JNJ), McDonalds (MCD), Procter and Gamble (PG), and United Technologies (UTX) generated positive total returns, bumped their dividends much faster than inflation, and plunked cash into investors’ pockets every quarter.
Beautiful music to anyone’s ears.
Finally, for profiles and analyses of a number of dividend-growth stocks, click this More Articles link and take your pick.
References and Links
- Nightly Business Report, Interview with John Dorfman, January 29, 2010.
- Wall Street Journal, “Bull Looks Long in the Tooth,” February 1, 2010.
- Associated Press, “Factory Activity Fueling Modest Economic Recovery,” February 1, 2010.
- Barron’s, “Gummy Bears,” August 24, 2009.
- BusinessWeek, “The Painful Truth about Profits,” November 4, 2002.
- BusinessWeek, “The Disposable Worker,” January 7, 2010
- Seeking Alpha, “This Market to Workers: 'Welcome to the Jungle,'” September 21, 2009.
- Forbes, “Recovery, Part Two,” January 21, 2010.
- Wall Street Journal Report, “Where to Put Your Money,” August 20, 2009 on CNBC.