Hey, what happened to the “accelerating economy” and “inevitable” rising interest rates? It was just another Wall Street pipedream. As Tuesday’s steep drop in the purchasing managers’ (ISM) index shows, the U.S. economy slowed sharply in January. Small wonder the Dow plunged 326 points, to its lowest close since mid-October.
Meanwhile, bond prices soared (yields plummeted). At today’s close, the benchmark 10-year Treasury yielded 2.58%!
Some commentators are trying to blame the emerging markets for this abrupt reversal of fortunes. That’s a lame excuse. As I repeatedly pointed out near the end of 2013 the U.S. stock market last year climbed far beyond what the moderate growth rate in corporate earnings would justify.
In the final quarter of 2013, the headline U.S. stock indexes were verging on bubble territory. What we’re seeing now is a healthy “correction”—exactly what the word implies, a swing back from incorrect to reasonable and proper valuations.
It’s entirely possible that, later on this year, stock prices will retreat further. However, nobody can know, beforehand, the precise magnitude of the pullback. So we have to operate on what we do know.
We know, for example, that the S&P 500 index has now dropped 5.8% from its January 15 all-time closing high. That’s almost the same percentage the index backtracked last year from the May 21 interim high to the June 24 low.
On the other hand, the largest dip of 2012 took the S&P down 9.9%, and the “corrections” of 2010 and 2011 shaved double digits off the institutional benchmark.
Thus, while I endorse the idea that you should selectively accumulate stocks and mutual funds, I also advise you to keep some powder (cash) dry in case Mr. Market offers us even better values in the weeks ahead. At this point, you might put to work 20%-25% of the cash reserves you ultimately plan to invest in stocks.
What to buy? Start with the high-yielding staples stocks such as Coca-Cola (KO), ConAgra (CAG), Procter & Gamble (PG), and Unilever (UL).
A package of these four (equal dollar amounts) will deliver a yield of 3.3%, well above the market average and far more than you could hope to earn on bank CDs of even the longest maturities. Furthermore, over the next five years, I expect these companies to raise their dividends, on average, twice as fast as the cost of living. What bond or CD can promise you that?
Once you’ve built up your staples holdings, move on to a blue chip healthcare name like Baxter International (BAX). Baxter, the world leader in blood-related products and therapies, not only beat analysts’ Q4 profit estimates but should also be able to post an earnings gain of close to 10% this year. At 13X forward earnings and a 2.9% yield, the shares are very attractively priced for a strong, recession-resistant business.
What about poor, tattered Newmont Mining (NEM)? I’m disappointed with management’s 2014 forecast, which calls for a drop in gold production and a rise in costs. Nonetheless, when Barron’s runs a headline that EVERYONE HATES NEWMONT MINING, it’s hard to escape the conclusion that an important bottom is probably not far off. A similar “everybody hates” headline tipped me off to the buying opportunity in Rayonier (RYN) last October.
Hate is an emotional word, most often used by people who have stopped thinking. That seems to be the case here.
I’m holding my modest stake in NEM, because I think the price of gold has bottomed and will head significantly higher as 2014 progresses. However, I also recognize it will be a tough slog at first.