Take A Bite Of The Apple…
January 25 2012
The State of The Union address has historically been a chance to push the reset button; a time to reflect on what has worked, what has not, and the opportunity to cast a vision for the year ahead. Americans certainly understand the severity of the problems facing the nation; they are significant. Polls show a vast majority of the American people believe the country is heading in the wrong direction, and with that, the President gave a typical laundry list of new initiatives which have no chance of becoming law. In a political season that resembles more of a reality TV show, the American people, as the President said "are justifiably cynical". The nation needs a debate on how we will solve our many problems; that's what elections are all about.
The good news is the markets have learned to ignore the demagoguing consistent with State of the Union speeches and look at the fundamentals underlying the U.S. economy. We can be cynical about our politics, but when looking at corporate earnings coming in for the fourth quarter you can't help but be impressed. With roughly 14% of the S&P 500 companies reporting fourth quarter earnings, 60% of those companies have beat expectations with a 10% rate of growth on those earnings. To top it off, Apple computer reported a blockbuster quarter, doubling earnings from a year ago on a 73% increase in sales; impressive indeed.
Never the less, the Federal Reserve will announce interest rate policy this afternoon, which in the "new world" of Fed transparency should be interesting to watch for a market response. We expect no change in policy, but the Fed chairman's press conference could tip his hand as to further easing this year. As there is political cynicism, so there is a cynical belief in the actions of the Federal Reserve. There is a growing belief that further Fed easing will come between now and the election in November. Of course, some question the need and others question the politics, but with record deficits on a trajectory that is dangerous, printing money to pay our debts is reasonable to believe; history would suggest that.
The question for investors has to be, is the current rally in stocks fundamentally driven by good corporate earnings or is there a monetary explanation for those increasing stock prices? Either way, in the short run, although corporate valuations are quite good, this market has some "maturing" to do. Some correction seems appropriate, and a little caution is warranted. A pull back in stocks, if it should occur, would be a good time to put some cash to work in high quality dividend stocks. Be patient, but opportunistic.
The views and opinions expressed are those of Kevin Clark of Raymond James & Associates, are as of this date, and are subject to change without notice. This report is for informational purposes only and is not intended as a complete description of the securities, markets or developments referred to herein. The information has been obtained from sources considered to be reliable, but accuracy is not guaranteed. Further information is available upon request. Past performance does not guarantee future results. There can be no assurance the trends mentioned will continue. Investing involves risk and you may incur a profit or loss. No investment strategy is guaranteed to be successful. Commodities are generally considered speculative because of the significant potential for investment loss. They are volatile investments and may not be suitable for every investor. There is an inverse relationship between interest rate movements and bond prices. Generally, when interest rates rise, bond prices fall and when interest rates fall, bond prices generally rise. The S&P 500 is an unmanaged index of 500 widely held stocks. It is not possible to invest directly in an index.
