by Mitchell Clark
With 2013 producing an outstanding year in equity market returns, investors will be looking for catalysts to sell until reports for fourth-quarter earnings season begin. Countless blue chips are trading right at their all-time record highs. Meanwhile, Wall Street earnings estimates have been going up for many of these companies for the first quarter and 2014 calendar year.
I think this upcoming earnings season will surprise to the upside; however, this doesn't mean that stocks will continue appreciating in value all year. If 2013 was a banner breakout year of "buy on rumor," 2014 may very well turn out to be the year of "sell on news."
Stocks are fully valued, but a positive disposition remains in investor sentiment with the prospect of continued low interest rates at the short end of the curve. Revenue growth among blue chips is generally expected to be in the low single digits and earnings growth should be in the high single digits.
But most blue chips are in extremely good financial health, and the prospects of higher dividends this year is probable. Therefore, investors in blue chip stocks have every reason to expect high single-digit to low double-digit rates of return from equities. Modest capital gains in the main equity indices are a very real possibility again this year, especially with the certainty of a low federal funds rate.
Near-term, good news may still result in stocks selling off, if only for the simple reason that they're due to. This market is very much a hold in anticipation of fourth-quarter earnings season results. I don't see a lot of action to take in a market that's gone up so tremendously in anticipation of better business conditions in the U.S. economy.
Strategy-wise, I still favor dividend paying stocks and dividend reinvestment for those investors who don't rely on the quarterly or monthly income. The NASDAQ Composite's accelerating outperformance last year was a classic sign that investors are willing to be more speculative over the blue-chip breakout that occurred at the beginning of the year. But the earnings power is with large-cap stocks, especially those corporations that have effected rising prices for their products and services without affecting demand. Combined with strong cash balances and the very low cost of money, the prospects for rising dividends in 2014 remain excellent.
While the outlook for dividend paying stocks is good, there was a lot of initial public offering (IPO) froth last year and many of these positions could easily be cut by a third if a real correction were to occur.
In terms of portfolio strategy, I see no reason why investors need to increase their investment risk by allocating a greater percentage of holdings to more risky positions. As the last few years illustrated, blue-chip investing can be very lucrative when the cycle is right. I think the cycle will continue to favor those stocks that are existing winners, of which many are blue chips. While this market is very much due for a meaningful price correction, those companies offering rising dividends should continue to fare well. Last year was about the big index moves; this year should be less about the indices, and more about the performance of individual stocks.