One thing I’ve learned about Wall Street in 40 years of investing: The trading crowd never runs out of subjects to worry about.
Sometimes the worries are legitimate. Sometimes they’re just fluff — filler to keep the conversation going. For example, consider the recent fuss over some analysts’ forecast of an “earnings recession.”
Mind you, almost nobody is calling for a real recession in the near future — a drop in the nation’s output of goods and services. A real recession would likely trigger a significant setback, perhaps 20% or more, for the marquee stock indexes.
Since the real thing is pretty much out of the question right now, Wall Street is downshifting the worry wagon to focus on a possible drop in corporate profits. Yesterday, Merrill Lynch came out with a prediction that operating earnings for the S&P 500 will slip this year to $117.50, from $118.78 in 2014 — the first year-over-year decline since 2009.
Let’s assume those numbers are pretty much on target. What can we conclude?
First, the projected decline is minuscule — only 1.8%. By contrast, S&P earnings plummeted more than 40% in 2008. Do I hear my dear, old mama — rest her soul — whispering something in my ear about mountains and molehills?
Oh, but it doesn’t end there. The Merrill team’s report noted that the “main drivers of the EPS contraction are the 50% drop in crude oil prices and the 20% strengthening of the dollar since last June. Excluding these two factors,” Merrill continues, “we estimate that EPS growth would be close to 10% vs. 8% last year.”
In other words, the vaunted “earnings recession” will be due entirely to temporary, and probably unrepeatable, causes. Apart from those, corporate America is thriving.
Guess what? If the Merrill analysts are anywhere near correct, equity investors will be sorely tempted to look past the earnings lull. Sure, we could get another single-digit pullback in the indexes, probably during the market’s seasonally weak May to October period.
Still, it will take a much bigger shock than this shallow “earnings recession” to do any profound, lasting damage to your stock holdings. Accordingly, while I’m on alert for signs of change, our asset allocation at the moment looks just about right (62% stocks, 38% fixed income).
Finding well-priced stocks to buy at today’s levels poses a stiffer challenge. Many companies on our recommended list have surged above our buy limits — a reason for caution in the near term.
If you’re looking to put cash to work, stick with names that haven’t yet broken out on the upside, such as General Electric Company (NYSE:GE) and Microsoft Corporation (NASDAQ:MSFT).
GE, in particular, looks attractive for its 3.7% yield — almost double what the Treasury is paying on a 10-year note. If CEO Jeff Immelt were to retire early, as some Wall Streeters have speculated, hopes of a major restructuring could spike the stock into the upper 20s or low 30s.
In company news, healthcare real estate investment trust Ventas, Inc. (NYSE:VTR) jumped 5% Monday on word that VTR will be buying hospital chain Ardent and spinning off Ventas’ nursing-home business. I’m generally in favor of the transactions, but I think the market’s initial enthusiasm was a bit overdone.
Let’s raise our buy limit on VTR to a point where the shares will yield 3.2%, which is acceptable for one of the best-managed and fastest-growing owners of healthcare real estate.
Richard Band’s Profitable Investing advisory service helps retirement savers outperform the market without losing a minute of sleep along the way. His straightforward style and low-risk value approach has won nine Best Financial Advisory awards from the Specialized Information Publishers Foundation.
