Tahoe Market Pulse: The 2016 summer doldrums … or not?
June 1, 2016
One of the safest predictions on Wall Street is that the market will be volatile. You'll never hear an analyst predict a calm and smooth market, nor an investment advisor (yours truly included).
So as we enter summer, expect volatility, though not as volatile (please!) as a year ago. Here are my reasons:
First, we're seven years into a bull market in which the S&P 500 is up more than 200 percent, about in line with earnings. No coincidence there. Surely earnings will not grow at the same pace for the next seven years, not even close. And without rising earnings, dividend growth will be slow.
A Morningstar study looked at the last five years and found that those S&P 500 companies that increased dividends each year gained 15 percent annually while those that skipped an increase or cut a dividend rose 10 percent.
And the dividend growers were less volatile. So dividend growth was (and is) essential. No wonder. To increase dividends a company must increase earnings year after year even when the economic pie isn't growing. Not many do.
Next, voters in the U.K. will decide whether the country should stay in the European Union. If they vote to go it alone, there would be unknown ramifications for trade, currencies and economic growth in the developed world. The polls show the issue is a toss-up.
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Finally, the Federal Reserve has indicated they'd like to hike rates again. If the data ahead of their June meeting improve, a rate boost would become more likely. Minutes from their last meeting said just that.
A big "if," of course. Employment data hasn't improved. Still, stocks sell off in knee-jerk fashion every time the focus turns to rising rates. Would a quarter-point boost in June or July and maybe another later in the year really be a game-changer for investors? I doubt it.
Stocks are at best fairly valued relative to earnings, which have been stagnant for two years and the main reason stock prices have gone sideways. Profit-taking, sometimes fast and sharp, should be expected.
But money has to go somewhere. The money market pays next to nothing and most fixed-income vehicles are vulnerable if rates rise by more than a token. Stocks, especially those that increase their dividends, remain in the sweet spot. Sound familiar? By now it should.
David Vomund is an Incline Village-based fee-only money manager. Information is found at http://www.VomundInvestments.com or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial advisor before purchasing any security.
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