The year started off with a bang, and the market seemed destined to run forever … until last week. Reality set in, and investors are rattled.
Luckily, our experts are here to help. From value to growth, from small-caps to large-, we’ve got you covered. Read on to see what our panel of experts are looking for in the second half … and how you can profit from it.
Recent Hiccup Provides Opportunity
By Daniel Wiener, The Independent Adviser for Vanguard Investors
After seven straight months of up markets with nary a hiccup, we finally got a bit of a pullback last week on what I believe is complete disregard or ignorance of Fed Chairman Ben Bernanke’s comments after the two-day Fed meeting.
If the Fed chair is even close to right, the second half of 2013 could shape up to be a good one, where corporate fundamentals begin to catch up to forward-looking valuations and expectations for further gains lead to higher stock prices late in the year.
The naysayers on Wall Street have maintained that the stock market’s recent rally to all-time highs has been fueled by the Fed’s easy-money policies rather than real economic and corporate profit growth. If that’s so, and if the economy begins to churn out more jobs in the coming months, then that leg of the bearish stool collapses. Assuming investors then begin to look further down the road they’ll see that greater economic growth will lead to greater manufacturing and service demand and will bid up stock prices in anticipation.
In the meantime, the recent market pullback has been just the ticket for the active managers running Vanguard’s best mutual funds. While the stock market may be down 4% or so from its all-time high, the tumult of the month’s final weeks means some stocks are down a whole lot more than 4%. Smart managers will be picking up bargains that have pulled back 8% or 10% and selling holdings that may have only backtracked 2%, setting us up for juicier gains down the road.
I remain a huge fan of Dividend Growth, Selected Value, Capital Opportunity and Health Care in our Model Portfolios and think that slightly better news abroad could give a boost to holdings like International Growth.
Collect Quality Bargains on the Pullback
By Richard Band, Profitable Investing
It’s flattering to have the world beat a path to your door. But I’ve got to admit: The big run-up in dividend-paying stocks since Jan. 1 has made my job as a value investor tougher. As prices rise, yields fall for new investors (unless, of course, the company in question boosts its dividend faster than the share price goes up).
Fortunately, the past few weeks have brought a decent — and long overdue — “correction” among many of the market’s prime dividend stocks. Utilities, real estate trusts and master limited partnerships have all backtracked. If you’ve been looking to feed some cash into these sectors, prices and yields are now more favorable than we’ve seen them in about three or four months.
For the broader stock market, the key question now is whether bond yields, which have surged since early May, will finally calm down. (Rising bond yields diminish the relative appeal of equities for investors who can choose to own either asset.) If interest rates ease in fairly short order — as I expect — the S&P 500 should be able to reach my target of 1680-1710 during the summer, or at latest sometime in the fourth quarter. Beware, though, of any two- or three-week stock rally not accompanied by falling bond yields. That would invite a severe setback.
Given the heightened interest-rate tensions (to say nothing of the usual economic problems in Europe and elsewhere), this is a time for extra selectivity in your stock purchases. Focus on companies with a proven record of compounding investor wealth over the long haul.
One great consumer-staples franchise has dipped back into the buy zone lately. Swiss-based Nestle (NSRGY) stands at the top of the heap as the world’s most admired consumer food-products company, according to Fortune magazine — a ranking Nestle has enjoyed eight years in a row. Sales to fast-growing emerging markets have soared from 30% of the company’s total in 2001 to 43% in 2012.
Nestle has also taken good care of its shareholders. Dividends, paid annually in May, have been sweetened for 17 consecutive years. Over that span, the payout has increased 673% in Swiss francs, a much stronger currency historically than the dollar. NSRGY truly qualifies as a world-class wealth compounder.
Current yield is 3.4%. Better yet, by holding the shares in your pension fund or IRA, you can avoid Swiss withholding tax on your dividends.
If I had to buy just one European stock and keep it for the rest of my life, Nestle would be it. Buy NSRGY at $67 or less for a projected total return of 15% or more in the year ahead.
The Opportunity in Summer Volatility
As we look ahead to the heat of July and wave goodbye to the June swoon, I am exceptionally bullish.
Yes, we just had a 700+ point drop in the Dow in just four trading days, but frankly I didn’t mind the June market selloff. It was only natural to see a pullback after the outstanding run we saw in the first five months of the year. In fact, we were able to pick up great stocks for the second half at stellar prices and leave the panic-sellers in the dust.
So rather than looking backward, I want to look forward to a number of summer catalysts that will provide significant upside through year-end.
Good economic data — but not too good: The Fed is forecasting for unemployment to decline to between 6.5% and 6.8% by the end of 2014. Economists widely expect for that 6.5% number to not be hit until 2015. In addition, the Fed expects to see at least 3% GDP growth in both 2014 and 2015. The consensus estimate among economists is for growth of 2.3% for 2013 and 2.8% in 2014.
So while I do expect slow-but-steady economic growth, I think that Ben Bernanke may be bluffing a bit with his recent QE statements that spooked the market. It’s hard to see the dove-dominated Fed getting fully out of the market anytime soon. Wall Street remains obsessed with the possibility of QE ending, but I don’t expect it to happen under Bernanke’s watch.
A multinational ‘turbo boost’ from the weaker dollar: Despite a shrinking federal budget deficit, rising bond yields and steady consumer spending, the U.S. dollar has significantly weakened against major currencies over the past month or so, recently hitting a 3½-month low against the euro and a 2-month low against the battered Japanese yen.
This is great news! A weaker dollar will help corporate profits rise in the second half of 2013 because multinational companies will be getting paid in currencies that appreciate as the dollar weakens. The earnings outlook for the S&P 500 should improve considerably in the upcoming months, so it will be key to make sure that you own the strongest earnings growers in the market.
A potential flood of money from bonds into stocks: Because of the hazy timetable from the Federal Reserve in tapping the monetary brakes, U.S. debt yields are surging and the 10-year Treasury bond yields have climbed to their highest level since August 2011 — gaining some 80+ basis points since the beginning of May.
These rising bond yields are likely to send more fixed-income investors back into the stock market, since nothing will make an investor feel worse than losing money in bonds as interest rates rise and their bond principal erodes. Back in 1995, when interest rates surged, it caused one of the most impressive and steady stock market rallies that I can ever remember.
So I hope that you were able to use the volatility we’ve seen so far this summer as an opportunity to pick and choose some stocks from your watch list while they were on a fire sale. I’m expecting a strong second half of the year, so please enjoy the ride this summer!
Decoding the Market with Relative Strength
By John Jagerson and Wade Hansen, Editors, SlingShot Trader
After an incredibly bullish first six months of the year, everyone wants to know where the market is going to go in the second half of 2013. Of course, predicting where the market is going to be six months from now is an incredibly difficult thing to do.
Here are a few potential scenarios. The S&P 500 could:
- Churn around resistance at 1600 for a little while longer before finally capitulating and dropping back to 1500 or 1400.
- Battle resistance near 1600 before eventually moving on to new 52-week highs.
- Continue to consolidate until Wall Street figures out when the Fed is going to start “tapering” and how quickly that process will take place.
We admit, those are three fairly evident statements to make. The market could go lower, it could go higher or it could remain flat. Thank you, Captain Obvious.
But we make those statements exactly because those statements are always true. Sure, there are some times in the market where there is a greater chance stocks are going to move higher or lower, but there are never any guarantees as to which direction the market in general is going to go.
That being the case, one of the best things we can do is watch and see how individual stocks and industry groups are performing in comparison to the market as a whole. That’s how you sift through all of the information that is out there and determine where the market’s strengths and weaknesses really lie.
So how do you do that? How do you determine which stocks are the strong ones and which stocks are the weak ones? You conduct a relative strength analysis.
Relative strength is a comparison of the price performance of one stock compared to the price performance of another stock, or market index. Typically, investors will compare the performance of an individual stock to the performance of the S&P 500 to see whether the stock has been outperforming or underperforming the index. If the stock has been outperforming the index, it has a positive relative strength. If the stock has been underperforming the index, it has a negative relative strength.
Market technicians have actually come up with many different methods for calculating relative strength, such as the percent-change method, the alpha method, the trend-slope method and the Levy method. Each methodology has its strengths and weaknesses, but for our discussion here, we’re going to focus on the original percent-change method.
The percent-change method compares a stock to the S&P 500 by measuring how much, on a percentage basis, the stock has moved during a set period of time compared to how much the index has moved during that same period of time.
For instance, if you were to look at the performance of the S&P 500 during the past six months, you would find that the index (as of the close Tuesday) has gained 11.3% – based on the closing value of 1,426.66 on Dec. 24, 2012, and the closing value of 1,588.03 on June 25, 2013. Compare that to the performance of Charles Schwab (SCHW), which has gained 46.8% — based on the closing value of $14.33 on Dec. 24, 2012, and the closing value of $21.04 on June 25, 2013 — and it’s obvious that, even though the S&P 500 has done quite well, SCHW has had a better six months.
To determine the relative strength ratio of SCHW compared to the S&P 500, you simply divide the percent gain of the stock by the percent gain of the index. In this case, you would get a ratio of 4.14 (46.8% / 11.3% = 4.14). The higher the ratio, the stronger the stock.
Using Relative Strength Today
So how can we put this to use for us today? Going back to our “Captain Obvious” statements from earlier, we don’t know where the market is going to go during the next six months, but we do know where it has gone during the past six weeks. That’s right — it’s gone down.
But not all stocks have dropped. Some stocks have actually thrived during this period. Those are the stocks you want to identify and focus on moving forward if you want to buy stocks during the next six months. If a stock has had the strength to withstand this recent pullback, it will most likely have the strength in the coming six months to outperform the S&P 500.
Note: We are very careful to say “outperform the S&P 500” rather than “go higher” during the next six months because a strong relative strength doesn’t guarantee bullish movement. It simply puts the odds in your favor that the stock will do better than the S&P 500 in the near term. Here’s how it tends to play out:
- If the S&P 500 moves higher, the strong relative strength stock will most likely move higher at a faster pace.
- If the S&P 500 remains flat, the strong relative strength stock will most likely move higher.
- If the S&P 500 moves lower, the strong relative strength stock will most likely remain flat or move lower at a slower pace.
In any one of these three scenarios, holding the strong relative strength stock is typically preferable, but there are never guarantees of actual price gains.
There are 108 of the 500 stocks that comprise the S&P 500 that are actually higher today than they were one month ago. Of the top 50, 19 stocks are in the Financial sector, 10 are in the Healthcare sector and 7 are in the Technology sector. This gives us a pretty good idea of which stocks might be outperformers (useful as we evaluate potential call options in our portfolio) and which stocks might be underperformers (useful as we evaluate potential put options).
Some Tactics for the Second Half
By Tom Taulli, IPO Playbook
Until about a couple weeks ago, the markets in 2013 were a no-brainer. Just about everything did well.
But nothing lasts forever, especially when it comes the investment game.
In other words, it’s a good bet that the second half of this year will be tougher. First of all, the Federal Reserve appears to being taking a bit of a hawkish approach to monetary policy. Part of this is due to the improvement in the U.S. economy, as seen with the rebound in autos and real estate. But it also looks like the Fed is taking steps to reduce some of the excesses in the credit markets.
At the same time, China is tightening up too. And the impact has been substantial for emerging markets in Asia. Just look at the volatility in currencies and commodities.
So what should investors do? Well, here are a couple ideas to consider:
Shorting: If markets remain volatile, this approach should help bolster your portfolio. Keep in mind that shorting allows an investor to make a profit when a security falls in value.
No doubt, there are a variety of funds to help do this, such as the AdvisorShares Ranger Equity Bear ETF (HDGE). The co-managers — which include John Del Vecchio and Brad H. Lamensdorf — are veterans of short selling. Keep in mind that they recently published a book on the topic: What’s Behind the Numbers?: A Guide to Exposing Financial Chicanery and Avoiding Huge Losses in Your Portfolio.
As should be no surprise, the ETF has had a tough year, down about 10%. But with the recent selloff, the fund has been able to show gains. It is up about 4% over the past month.
Bonds: Be defensive. The bond market has been in the bull mode since 1982. Besides, the Fed has kept rates at artificially low levels since the financial crisis of 2008.
Thus, it is reasonable to see rates start to move upward. But this can be horrible for bond funds. Even some of the top operators have done poorly, such as Bill Gross’s Total Return Fund (BOND). It’s off about 5% since early May.
Now, this doesn’t mean you should just dump your bond funds. Instead, it is probably a good idea to focus on those that have short durations — say, under three years or so. This is the average time it takes for the portfolio to mature. This is important since a short-duration fund will get its money back quicker and can then redeploy the capital into higher-yielding securities.
One option to play this is the JPMorgan Limited Duration Bond Fund (ONUAX), which has weathered the bond route. In 2013, the return is 1.10%. The fund, which invests in government and high-grade corporate bonds, has a duration of 1.4 years.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
Lever Into Cyclicals
By Bryan Perry, Cash Machine
After a long-overdue correction, buyers took the market by the reins this week with some aid from the European rally and some advances in the Asian markets. As of Wednesday’s close, winners outpaced losers by about a 4:1 ratio, providing some credibility to the day’s gains — and this came despite the downward revision for first-quarter GDP growth (1.8% vs. economists’ estimates of 2.4%).
The real bright spot is the strength in all high-yield sectors on the heels of a nice rally in Treasury bonds. The 10-Year Treasury note yield closed Wednesday down to 2.55%, right in the middle of the day’s trading range. A move back below 2.4% would do much to hoist the high-yield universe a level higher, as it would suggest a top for bond yields has been hit.
Forward-looking data still calls for rotating capital into assets that are more leveraged to the economy, and for now I’m sticking with that school of thought unless the data starts to say otherwise. That may sound a little like the Fed-speak of late, but improving business conditions in parts of Europe, China’s newfound resolve to stem a credit bubble crisis and an upbeat U.S. consumer give rise to the prospect of higher interest rates ahead.