It’s uncanny, but the stock market really does seem to be following, pretty closely, the script I’ve given you for the past few weeks. We got a burst of strength off the mid-June lows. Now the market is working its way back into the base it formed earlier. That process could take another week or two, but then comes the Big Resolution!
Big resolution? Yes. It doesn’t take a genius to identify the two major forces behind the “correction” that started in late April: the European sovereign-debt crisis, and the U.S. debt-ceiling standoff.
For better or worse, both of those issues are nearing a resolution. Either the Europeans will hold their system together one more time, or they won’t. Either Obama and Congress will cut a last-minute deal, or they won’t.
I don’t pretend to have any special knowledge of the politics at work here. However, I can tell you from the stock market’s behavior to date that a positive resolution is likely in both cases.
Yesterday’s trading was illustrative. Granted, it was a down session for all the headline indexes. However, the market staged an orderly retreat, with certain blue chips, such as J.P. Morgan Chase (NYSE: JPM) and McDonald’s (NYSE: MCD), showing excellent relative strength.
In fact, Mickey D’s, which I own in my model portfolio, touched an all-time high yesterday I’ve flogged MCD stock over and over again — it’s one of the largest holdings in my personal portfolio. If you were brave enough to follow my lead, toast yourself with a Real Fruit Smoothie and maybe even throw in an Angus burger too!
Actually though, JPM told an even more revealing tale yesterday. Despite a barrage of anti-Morgan sentiment (one ridiculous video Wednesday accused CEO Jamie Dimon of running a “house of ill repute”), the nation’s largest bank by market value posted a smart 16% jump in Q2 earnings — $1.27 per share versus the Wall Street consensus of $1.21.
If the economy and stock market were about to collapse, do you think JPM would be racking up its biggest second-quarter profit in history? Yet that’s what happened. Keep buying the shares up to $46. From here, I’m targeting a total return (dividends plus price gain) of 25%-35% in a year.
Another attractive buy from my model is defense contractor Raytheon (NYSE: RTN). Lately, the stock has been marked down on worries that a “grand compromise” between Obama and the GOP might include savage defense cuts.
Again, I suspect the resolution will turn out considerably more benign than the Street fears. With a low-debt balance sheet and diversified business lines, RTN is well equipped to cope with any adjustments Washington may make in defense spending.
The stock is also throwing off a delicious 3.7% yield, with a record of seven annual dividend increases in a row. Pay up to $50 for RTN.
