The Stock Market Stumble That Wasn’t

by Richard Band | November 21, 2012 11:40 am

Bravo! After Monday’s monster rally[1], stocks could easily have sold off Tuesday — especially after Federal Reserve Chairman Ben Bernanke warned[2] Congress and the Obama administration that failing to deal with the fiscal cliff would pose a “substantial threat” to the economy.

Instead, the market snapped back[3] from a bout of weakness in the early afternoon and closed higher on both the S&P 500 and Nasdaq indexes. Advancing stocks outnumbered decliners by a 17:13 margin on the Big Board, and heading into the holiday-shortened Thanksgiving break, investors should be breathing a sigh of relief.

In short, the bounce I predicted in last Thursday’s blog (“equities are due for a lift”) is clearly under way. Assuming key Washington players continue to make soothing noises about resolving the cliff and reforming the nation’s finances, it seems likely stocks will follow the traditional Deck the Halls pattern: up through year-end, with some additional strength possibly spilling over into the New Year.

By late December, it should be evident whether a grand fiscal bargain is in the works. If the answer is yes, I would agree with Bernanke’s view that 2013 could turn out to be “a very good one for the American economy.”

As I explain in the December newsletter, however, there will be plenty of opportunities, between now and year-end, for the politicians to drop the ball. Given the risks, I’m not inclined to boost the equity weighting in our model portfolio (51% of the total) right now.

On the other hand, if you’ve got cash reserves far in excess of a reasonable 5% to 10% of your portfolio, you should do some selective buying among both the stocks and bonds I recommend in the December issue.

For members of our audience who find themselves chronically overcautious and worried, I suggest taking a baby step with an exchange-traded fund like PIMCO 0-5 Year High Yield Corporate Bond Index ETF (NYSE:HYS[4]). It’s paying 5.5%, based on the past three months’ distributions, and the fund’s short maturity structure helps minimize defaults.

Among our individual stocks, I’m still beating the drums for utilities[5]. In recent days, I’ve seen a number of articles pooh-poohing this sector because, allegedly, utility stocks are trading at higher P/Es than usual relative to the overall market.

It’s a misleading argument. What it ignores is the fact that earnings for many U.S. companies (but not utilities are inflated by historically wide profit margins. Those fat margins, in turn, have resulted largely from the federal government’s unprecedented deficit spending, which has supported demand across a broad spectrum of industries.

Sure, it seems that an electric utility like Xcel Energy (NYSE:XEL[6]) is “expensive” at more than 14x estimated 2012 earnings, when General Motors (NYSE:GM[7]) is trading at less than 8x.  But GM is alive today only by the grace of Uncle Sam, and may be headed for bankruptcy again when the next economic downturn comes along.

Thus, GM, on normalized earnings, may be a lot more expensive than XEL. It’s certainly many times riskier! Buy XEL, a member of our Incredible Dividend Machine. Current yield: a safe, dependable 4.1%.

P.S.  Puzzling news Monday from Intel (NASDAQ:INTC[8]). CEO Paul Otellini, 62, announced he will retire[9] next May. Most observers, including me, had expected Otellini to stay on for another two or three years to lead Intel’s charge into mobile computing. Apparently, Ottelini believes the company needs a fresh face (someone with more youth and energy?) to handle this challenge.

He may be right. Until the next CEO is chosen, though, investor speculation will run rampant — and the stock will be volatile.

  1. Monday’s monster rally:
  2. Ben Bernanke warned:
  3. the market snapped back:
  4. HYS:
  5. beating the drums for utilities:
  6. XEL:
  7. GM:
  8. INTC:
  9. he will retire:

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