“Will the Rally Continue in Q2?”
And frankly, it’s a valid question. After an 8.4% run for the Dow, there will be a pullback. It’s natural to see a little profit-taking. Without this digestion of gains, you get big run-ups and massive selloffs that ultimately cancel each other out.
However with inventory overhangs, gas prices on the rise and hints that consumer confidence could take a dip, it will be harder for the economy alone to drive the market higher at the same rapid pace as seen in Q1.
Don’t get me wrong, there’s nothing wrong with the economy, and I’m still bullish.
And if you still don’t want to take my word for it, hopefully you were encouraged to hear Ben Bernanke say he’s not taking any options off the table when it comes to maintaining the economic recovery. That’s not to say that there won’t be some challenging headline events for the market to tackle, and I see three in particular ahead:
Challenge #1: Peak Earnings. It is getting increasingly difficult for companies to trump their sales and earnings versus the same quarter of last year. Ever since the financial crisis when companies everywhere took a massive hit to earnings, it’s been easy for companies to post massive year-over-year improvements. Let’s face it, most companies had nowhere to go but up.
Sure it was fun while it lasted, but we’ve always known that these results weren’t sustainable.
So now, the year-over-year comparisons are getting tougher. This does not mean that there’s anything wrong with the economy or the markets. Earnings growth will continue for strong companies, but the growth rate will be slower than what we’ve seen in recent quarters. I expect that the average stock is going to struggle to get much more than 10% earnings growth this year.
Now, that does not mean that all stocks are going to suffer. It means that smart investors are going to have to focus their buying on companies that are able to grow their sales and earnings at a healthy rate that meets or beats the 10% average.
To beat the market, you must stick with stocks that can deliver incredible earnings.
Challenge #2: Higher Oil Prices. It’s probably not a surprise that I expect to see the rising price of oil and gasoline becoming a key issue of Q2. Higher prices at the pump mean higher expenses for businesses and less money in consumers’ pockets. And I see prices remaining at these high levels.
What many people don’t realize is that many commodities, like oil, are priced in U.S. dollars. With interest rates at ultra-low levels and with the Fed making it very clear that it will not be raising interest rates through 2013, the dollar has nowhere to go but down. With the value of the dollar on the decline, the price of commodities rises. As you can see, even with some increased production and supply, it’s going to be tough to find any relief from rising prices.
But instead of getting mad, I recommend you get even by investing in companies that benefit from rising oil prices.