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The outlook is improving in the oil patch. As energy producers have cut back in response to low prices, the growth in supply has declined and demand has held steady, says market strategist Paul Christopher, of Wells Fargo Investment Institute, the research arm of the financial-services giant. The other key to earnings improvement is the dollar. A weaker dollar helps exporters and multinational companies by making their goods more competitive overseas and by translating sales generated overseas into more dollars here.
Think of an earnings recovery as the engine that could kick the stock market into gear in the second half of the year. Companies that generate healthy free cash flow—the amount of cash profit left after capital expenditures—are a great place to start. Executives at big free-cash generators have a lot of options: They can invest in their businesses, buy back stock, acquire other companies, pay dividends or engage in some combination of all four.
Income-seeking investors should focus on dividend growth rather than on the highest-yielding stocks. Companies with the wherewithal to increase dividends have done well in range-bound markets, according to an analysis by BMO strategist Belski. Moreover, a focus on dividend growth, as opposed to high yield, will lead you to companies that have stronger balance sheets and better earnings growth potential. And the shares of dividend growers are cheaper to boot.
But the dividend growers trade at just 14 times estimated year-ahead earnings, on average, and the high-yielders trade at 16 times. Manager Donald Kilbride looks for companies that have increased dividends over time and that are trading at reasonable prices.
Investors with a long-term view will benefit from looking beyond U. A sharp rally early in the year, followed by a more recent pullback, makes it clear how volatile these markets can be. The direction of the dollar is key. A surging greenback pressures emerging nations because many have to repay debt denominated in dollars. And many developing countries rely on the export of commodities that are priced in dollars and tend to fall in price when the greenback appreciates.
The risk, he says, is that the massive debt taken on by state-owned enterprises will become a black hole that obliterates economic growth. The Harding Loevner fund, a member of the Kiplinger 25 , is our favorite fund for investing in these dicey markets. Schmidt and his colleagues are focusing on countries where reformist governments have adopted pro-growth economic policies, including India and Mexico, and on smaller nations, such as Indonesia and Colombia.
Syme favors India and China, as well as countries that export to the U. Bonds will have a tougher slog than stocks throughout the rest of The trick is to find the parts of the bond market that will deliver more than a minuscule yield while limiting the risk of default, as well as do at least okay when rates rise in earnest. TIPS maturing in 10 years provide an after-inflation yield of 0. Investors who can ignore the scary headlines about struggles in Puerto Rico, Chicago and elsewhere can find opportunities in municipal bonds, says James Dearborn, head of muni bonds at money management firm Columbia Threadneedle.
He reminds investors that the muni market includes more than 50, issuers, and that state and local revenues have now eclipsed the peaks reached prior to the financial crisis. Given the history of gold-market cycles, however, it seems too soon to project a new bull market in the precious metal. Among them: a potentially weaker dollar the price of gold usually moves in the opposite direction , a pickup in inflation and the threat of geopolitical crises.
An Investors' Guide to the Gold Rally. Skip to header Skip to main content Skip to footer. Skip advert. I know that doesn't get your engines revving, but it is a consistent pace that makes this one of the longest expansions and bull markets in history. I appreciate that on average there has been a recession every years.
But that is often because the boom times are too good leading to excesses that bring to life the next contraction. So no serious fear of an imminent recession. Now let's address the other side of the coin I know folks who point to a historical average PE of 15 in order to say that this market is getting stretched given the trailing PE of However, there is much more to the story. First, the market looks forward. That creates a PE of Second, PEs in the latter stages of bull markets typically move higher given the confidence folks have in a positive outcome.
So a PE of is more standard at this stage of the game. Lastly, and most importantly, is the relationship stocks have with Treasury rates. So let's do that math. Earnings yield is the inverse of PE. Whereas the 10 year Treasury is only providing a meager 2.
Given this historical relationship, there is still ample upside for stocks. What if rates keep rising? More on that topic in the "Potential Pitfalls" section below. Thus, the easy money has been made, which explains the basically breakeven performance in Unfortunately the results for are not looking much better. In some of my recent commentaries I have shared the following equation to predict future stock market returns. Here it is again:.
Inflation is the bigger mystery. The outlook shared above is based upon the information in hand. As things evolve it may get better So let me now prepare you for 2 potential hazards out there. Gladly history does not repeat itself like clockwork as right now we are in month 82 of this growth phase. Again, the 1 cause of bear markets is a recession. So as this expansion gets longer in the tooth, we all need to be on active watch for any signs of contraction.
When that happens, it is time to lighten the load and get prepared for the next bear market. Right now that is still very favorable for stocks as bond rates are near historic lows. However, in December the Fed raised rates for the first time since This has pushed up the rates on some short term bonds, but amazingly the 10 year Treasury rate is actually a notch lower than before the announcement.
Because the Fed has promised to exercise great caution in making future rate hike decisions. In fact, the Fed members have already predicted that the Funds Rate will likely be between 1. Add virtually no inflation on top of that and there is no current reason for the 10 year rate to move markedly higher.
And thus stocks are still attractive. If the Fed moves faster than expected, or inflation kicks up, then yes 10 year Treasury rates will rise. Above that level and it will start to call into question the relative value of stocks versus bonds, which would spark a correction even if other economic indicators are positive. So be sure to keep tabs on how this progresses over time. Overall the stock market is still the best place to find solid investment returns. With this in mind, I invite you to choose from two holiday gifts with our gratitude for being a valued member of our Zacks community.
Both are timely Special Reports "hot off the presses. Are you mostly inclined to long-term investing? Then pick our "5 Stocks Set to Double" report. Do you lean more toward short-term trading? Then pick the "7 Best Stocks to Kick-Start " report.
Our experts culled these 7 stocks from today's Zacks Rank 1 Strong Buys as most likely for early breakout in Whichever gift you choose, I wish you happiness, health, and outstanding investment success in the year ahead. Steve Reitmeister has been with Zacks since and currently serves as the Executive Vice President in charge of Zacks. He is also the Editor of his personal portfolio service, the Reitmeister Trading Alert.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report To read this article on Zacks. Zacks Investment Research.
Shares of Acadia Pharmaceuticals Inc. The committee on Friday voted that the benefits of pimavanserin do not outweigh the risks. The FDA, which is not required to follow the advice of the committee but often does, is expected to decide whether to app. Sundial Growers Inc. To make matters worse, there's the growing likelihood that the U.
When you inherit property, the IRS applies what is known as a stepped-up basis to that asset. Here's how capital gains are taxed on inherited property. The move marks a shift to an aggressive stance against inflation, and an attempt by the Fed to head off a potential recession.