I admit that the profit taking in April was sudden, without any warning. As a result, the day-to-day volatility has definitely risen.
In fact, the S&P 500 breached fresh all-time highs, yet gained less than 1% last month. And, so far, May has been much of the same, as the stock market rallied near the new highs only to once again fall back.
Still, I expect any selloff will “catch itself” sooner rather than later because the stock market is the place to be. The S&P 500’s dividend yield continues to exceed both cash and Treasury equivalents, as the Bespoke chart below illustrates.
Any time the 10-year Treasury bond has crossed below the S&P 500’s dividend yield, the S&P 500 has traditionally risen 31.5% in the next 12 months. So, I expect the overall stock market will continue to “melt up,” even on light trading volume, thanks to the continuing ultra-low interest rate environment.
Virtually everyone now knows that the Federal Reserve cannot raise key interest rates for the foreseeable future, since it remains “data dependent.” The Fed has many reasons why U.S. GDP growth was anemic in the first quarter — blaming severe winter weather, the strong U.S. dollar, a slowdown in the energy patch and a faltering jobs market.
The fact of the matter is that the U.S. now has an uncertain economic outlook, and the Fed will not raise rates any time soon.
So, I expect that Fed’s 0% interest rate policy will continue for all of 2015 and likely into 2016, as well. Next year is an election year, and there will be mounting pressure on the Fed to not raise rates. As a result, the Goldilocks environment (where the economy is not too hot or too cold) will likely continue.
This ultra-low interest rate environment will also fuel more stock buybacks this year and dividend payments will continue to rise. Corporate America, led by Apple Inc. (NASDAQ:AAPL), returned $904 billion to shareholders via dividends and buybacks in 2014. Apple recently announced that it would expand its dividend and stock buyback program to $200 billion, up from $130 billion.
So, persistently rising dividends and stock buybacks will also support the stock market, which should resume its steadily appreciation this year.
In this environment, our best defensive remains a strong offensive of fundamentally superior stocks. As I mentioned earlier, the stocks that fit the bill to a “T” have strong forecasted earnings and sales. Those that don’t bounce back sufficiently or grow too volatile will likely be sold.
Louis Navellier is a renowned growth investor. He is the editor of five investing newsletters: Blue Chip Growth, Emerging Growth, Ultimate Growth, Family Trust and Platinum Growth. His most popular service, Blue Chip Growth, has a track record of beating the market 3:1 over the last 14 years. He uses a combination of quantitative and fundamental analysis to identify market-beating stocks. Mr. Navellier has made his proven formula accessible to investors via his free, online stock rating tool, PortfolioGrader.com. Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.
