Has the world dodged another bullet? Certainly, the behavior of the financial markets this month would suggest so. Stocks have risen, with the benchmark S&P up 4.5% year to date (through Tuesday’s close). Treasury yields have climbed, at least at the long end of the maturity spectrum. And the dollar has eased against the currencies of our major trading partners.
Risk is “on” again.
Even in troubled Europe, some of the clouds have lifted a bit. Italian bond yields, which stood at 7.1% on the last trading day of 2011, have since fallen to 6.27% — still too high for comfort, but clearly heading in the right direction.
I’m pleased with these developments, because they could mean a “life extension” for the equity rally that began in early October. I was bullish (a buyer of stocks) in the vicinity of the lows, but I’ve turned much more cautious since the market roared back in December — this month as well.
What would it take to make me an eager buyer again? One factor I’ll be watching carefully is the market’s reaction to unexpected, adverse news.
In the past month or two, we’ve been treated to a lot of news that was better than (or less bad than) the consensus foresaw. The Citigroup Economic Surprise Index has shot up to the top of its range and stayed there for about nine weeks — a long time for the “macro” news flow to come in better than economists had predicted.
Soon, the pendulum will swing the other way (it always does) as corporate earnings reports will include a few warts and wens and economic releases fall short of investors’ increasingly fervent hopes.
Then we’ll get a chance to appraise the market’s true underlying strength. If the S&P can navigate through February and into March without more than a 5% pullback from its 2012 high, I may well boost my portfolio’s stock weighting.
Meanwhile, the market has fulfilled my long-held upside projection for the post-October bounce (1,300-1,325 on the S&P). So now is a good time to comb through your own portfolio and exit stocks that might have come along for the ride in recent weeks, but are now richly valued.
One such name I’ll be exiting is First Horizon National (NYSE:FHN). The Tennessee-based banking chain stumbled badly during the financial crisis.
Recovery is coming slowly, with 2012 profits estimated to be less than one-quarter what the company earned in 2006 — the last year before the crisis hit. Yet, the stock has jumped 67% from its October low.
Looking out to the next 12 to 18 months, I think my money will grow faster elsewhere. So, I’m selling FHN.
On the buy side, I continue to be intrigued by the gold miners, especially Barrick Gold (NYSE:ABX). Over the next few years, as Barrick’s production ramps up and capital spending tails off, free cash flow should explode.
As a result, it’s conceivable the dividend will double or even triple (from the current 60 cents annually) by 2016. Buy ABX now.