By Mitchell Clark, B.Comm
The single greatest certainty capital markets are looking for is policy stability from the Federal Reserve, and Janet Yellen, the new Chair of the Federal Reserve, delivered the goods for Wall Street.
With certainty in regards to short-term interest rates and the expectation that quantitative easing will continue to be reduced over the coming quarters, the fundamental backdrop for the stock market remains positive.
Many companies sold off after reporting earnings results that basically met consensus. This was well-deserved, especially in a market that has not experienced a meaningful correction for a number of quarters.
Particularly for large-caps, corporate earnings results in the last quarter of 2013 were decent and corporate outlooks for 2014 were also relatively positive, considering the current state of things.
Add in the high likelihood of rising dividends from blue chips in the bottom half of the year, and you have the makings of another decent year for stocks.
Corporate balance sheets are in top-notch condition, and the cost of capital is cheap. From the corporate perspective, this is the perfect backdrop for greater growth, and sales growth translates to the bottom line.
For the last couple of quarters, I’ve been reticent about investors buying this stock market. Long investors benefited tremendously in 2013, even by owning blue chips. While the expectation has been for a major stock market correction (or collapse), one has yet to transpire. Instead, we are getting meaningful price consolidation, which is happening again.
The lack of a meaningful double-digit price correction in the stock market illustrates the continued underlying fervor that institutional investors have to be buyers. With continued certainty from the Federal Reserve, the bottom half of 2014 could produce decent capital gains, given current information.
Predicting where the stock market is going to finish in a year’s time is a pointless exercise, but the backdrop is there for investor sentiment to be supportive of equities, even after last year’s tremendous capital gains.
Currently, the stock market is a big hold. Choppy action due to emerging markets and currency turmoil is real, but it’s also a reflection of a marketplace that’s been looking for reasons to sell.
Near-term, price consolidation might continue right into the third quarter. With certainty from the Federal Reserve, the most important information in this market is what corporations say about businesses. Outlooks are always reserved at the beginning of the year.
Automatic Data Processing Inc. (ADP) is a well-known payroll/human resources outsourcing firm that is considered a stock market benchmark. (See “Institutional Investors’ Risk of ‘Having to Be in Stocks’ High.”)
The company reported nine-percent growth in sales to $3.0 billion in its most recent quarter. Earnings were down slightly to $377 million comparatively, but management upped this year’s sales growth range from its previous forecast to between seven and eight percent.
Earnings expectations for 2014 represent decent corporate growth. It’s more likely, however, that the stock market will recognize this in the bottom half of the year.