If yesterday's market action tells us anything, it certainly shows how completely unpredictable the markets could be. I would have bet a bunch of money (and lost) that yesterday would have been a big UP day due to another round of "nation saving" that we have been getting used to.
Obviously I was too premature in suggesting that the market correction, that is now more than two months old, was over. I felt that given the 10% drop in the S&P from its April 2nd high of 1419 down to 1279 on June 4th was quite enough of a correction.
I spoke too soon.
The Eurozone noise is still blaring, with the Greece elections on tap for June 17th, and even though the "slap heard round the world" took center stage for a moment, it really does appear that the debt issues are not yet ready to be put to bed. I still firmly believe that no nation will be "allowed" to fail, simply because the effect would be worse than the alternative (the bail outs), but the drama is still taking center stage.
The Eurozone is center stage but there are issues that keep nagging the markets as well;
- Unemployment is at 8.2% which is a tick higher than the previous month, even though many unemployed have fallen off of the benefits rolls. That is not a positive for the still fragile recovery
- The US manufacturing rate has slowed and actually dropped a bit last month,as you can see in this chart:
The I.I. level (inventory index) fell to 46.0 in May from 48.5 in April, which is another sign that products made are not being sold and inventories are being trimmed in anticipation of slower growth ahead as well.
- Housing prices have continued to drop, even at a slower pace, but not enough to offer much encouragement in the housing sector as the S&P/Case-Shiller indices show clearly in this report.
If housing prices continue to fall, it does not bode well for homeowners still underwater or seeking to refinance their mortgages. This can have a cascading effect as already has occurred up to now, but another round could follow, even though I do see signs of life in the home building sector.
The report notes:
While there has been improvement in some regions, housing prices have not turned," says David M. Blitzer, Chairman of the Index Committee at S&P Indices.
Pretty much sums up the entire report I would think.
- Personal income barely rose, and spending outpaced that rise in income
As of the last report, income rose an anemic .2% and spending rose .3% from the previous month's report. Obviously when personal spending outpaces income, the forward looking numbers could become weaker as people adjust spending more in line with income. On the other hand, it could signal that the consumer confidence level is rising which would be a positive sign.
- Consumer confidence drops last month as well
Levels dropped from 68.7 down to 64.9 and a drop of over 5% in that number is significant, as noted in this Associated Press report which states:
The May figure, which represents the biggest drop since October 2011 when the measure fell about 6 points, shows that consumers need more encouraging news before their concerns start to dissipate. Despite easing gas prices, Americans continue to be concerned about slow hiring, declining home values, big drops in the stock market and a worsening European economy that they fear will negatively impact the U.S.
What Action Should We Take
Markets that are in a state of flux are the most difficult to navigate in my opinion. There are too many false starts and stops in either direction to gain any momentum. The only way we can invest wisely right now is to "play defense" as your best offense.
There are a bunch of defensive stocks I like but to me the best stock to hold and add to now is Procter and Gamble (PG).
Procter and Gamble: Price: $62.54/share, Dividend Yield: 3.70%, ESS Rating: Bullish
Back in 2008, prior to a big drop, the share price was around $74.00, and since recovering from about $45.00/share in 2009, the stock has basically flatlined for over 2 years now.
Its business summary is quite clear and direct From Yahoo! Finance;
The Procter & Gamble Company, together with its subsidiaries, provides consumer packaged goods and improves the lives of consumers worldwide. The company operates through six segments: Beauty, Grooming, Health Care, Pet Care, Fabric Care and Home Care, and Baby Care and Family Care.
It does not get much more defensive than that, and the sectors the company plays in can continue to grow in virtually all economic climates. Not only that, the entry price right now is a bargain in my opinion.
A ridiculously low beta of .33 and a share price in the mid range of it's 52 week chart that pays shareholders $2.25/year in dividends (at a secure payout ratio of 64% by the way) should give investors plenty of reasons to have this stock firmly planted in any portfolio, especially for DGI portfolios.
A strong defense when the markets are in a state of flux, is perhaps the best way to ride out the rough roads. Aside from simply holding too much cash, we can buy a stock like Procter and Gamble, or add to our current position, and get paid a bit more to wait things out.
Procter and Gamble fills that desire for many investors.
Disclosure: I am long PG.