No luck o’ the Irish for Wall Street yesterday. The Dow Jones Industrial Average rained on St. Paddy’s parade, closing 128 points in the red (not green!).
But hold on there. The Federal Reserve wraps up its policy meeting Wednesday afternoon, and one little word from Chair Janet Yellen could turn things around — perhaps not immediately, but most likely within the next few sessions.
The word? “Patient.”
For the past couple of months, the Fed has pledged to remain patient about normalizing monetary policy (i.e., raising interest rates).
Most observers, myself included, now expect the central bank to drop that language in Wednesday’s policy statement. Eliminating the nod to patience would clear the way for the Fed to push through its first rate hike as soon as June 17.
Some Wall Streeters are quaking in their boots at the thought of an end to virtually free money. I say, “Let’s hear it, Janet.”
If it turns out the economy can’t stand even a quarter-point (or eighth-point) increase in lending rates, the Fed can always backtrack. More likely, this baby step toward normalcy won’t hurt business activity to any appreciable extent.
Nor will it stop the stock market’s progress for long. Already, various technical gauges (stochastics, upside/downside volume, put/call ratios, etc.) are hinting that a short-term bottom is near. If investors decide that the Fed really isn’t such a big threat (for now, anyway), another “surprise” rally could explode out of the gates within the next few days, lifting the Dow and S&P 500 to fresh all-time highs by late March or early April.
Still, enough stocks with nice dividends are in within the buy range for us to join the fun. General Electric Company (NYSE:GE), which yields 3.65%, and Intel Corporation (NASDAQ:INTC), which yields 3.15%, are still strong dividend stocks to buy.
I’ll also put in a plug for Procter & Gamble Co (NYSE:PG). Monday, a Bloomberg story suggested that Procter & Gamble may be planning to sell or have initial public offerings for a bunch of its beauty products in a single deal.
While PG has since dismissed the report as speculation, such a move would fit perfectly with CEO A.G. Lafley’s strategy to slim down Procter & Gamble and boost profit margins. PG investors would almost certainly cheer a restructuring of this sort.
Keep buying PG as it currently yields a solid 3.1%. From Procter & Gamble’s current level, I’m projecting a total return (dividends plus price gain) of 15% or more in the coming year.
Looking out to the summer months, I expect the U.S. stock market and its global peers to face greater uncertainty (and volatility) as investors begin to speculate on exactly how far the Fed might carry its credit-snugging campaign. Thus, I think the time is now ripe for us to shift our model portfolio in a somewhat more conservative direction and maintain stocks paying dividends.
Effective immediately, we’re selling WisdomTree Emerging Markets Small Cap Dividend Fund (NYSEARCA:DGS) and shifting the proceeds (5% of the model portfolio) as follows: 4% to Growth & Income Plays and 1% to World-Class Franchises. I’ll be making a similar reallocation in our model fund portfolios over the next day or two, eliminating our equity stake in emerging markets.
Over the long term (five years and more), I continue to believe that the developing economies — and their stock markets — will produce superior results. Until “king dollar” gets knocked off his throne, however, it will be difficult for U.S. investors to earn competitive returns on emerging-markets equities (currency translation is dragging down the value of our holdings in dollar terms). We’ll be back, but only when the dollar’s strength shows signs of reversing.
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.