The headline “Sell Your Stocks and Take Six Months Off” is the worst advice ever. The economist interviewed in the article states that slowing economic growth in China and the U.S. — as well as the Federal Reserve’s potential rate hike this year — will increase market volatility and wipe out your investments.
There’s no doubt that market volatility has accelerated this year. In March, alone, there were seven instances where the Dow Jones Industrial Average shifted 200 points or more in a single day.
Still, implying that upcoming market volatility will “wipe out your investments” is just nonsense — especially if you’re invested in fundamentally superior stocks.
Yes, April is going to be a big test for the overall stock market. The U.S. dollar has rallied an amazing 12% in the first quarter and is up 22% versus the euro since last June. As a result, many of the multi-international companies that dominate the S&P 500 are really struggling.
When first-quarter earnings announcement season kicks off next week with Alcoa Inc‘s (NYSE:AA) report, we’ll see just how much the U.S. dollar squelched earnings and sales last quarter.
Because of the strong U.S. dollar, the S&P 500’s first-quarter sales are expected to be flat and earnings are anticipated to slide down 3.6%. So, now that the S&P 500 is no longer generating positive earnings growth, many investors are questioning how the overall stock market will react. The answer is relatively simple.
Many investors are fleeing multi-international stocks that are severely hindered by a strong U.S. dollar — and that flight will accelerate as first-quarter earnings announcement season gets underway. So, market volatility is here to stay, but that doesn’t mean you should give up and sit on the sidelines.
Money is not going to leave the U.S. stock market. The S&P 500 has an average dividend yield of 2%, which is higher than the 10-Year Treasury and higher than the bank. That means, if you’re looking for a decent yield, the stock market is really your only option.
Therefore, investors aren’t cashing out of the market; rather, they’re gravitating to more promising, fundamentally strong stocks. In particular, domestic stocks, especially those in the small- to mid-cap arena, are garnering the most attention.
Now, mega-cap, multi-international stocks have one big advantage versus small- to mid-cap companies; they can borrow at much cheaper rates. As you move up the capitalization ladder, stock buybacks become much more prevalent. However, the worrywarts and naysayers in the financial media like to refer to stock buybacks as “financial engineering,” which it is.
I personally have no criticism of these companies trying to boost their underlying earnings per share via stock buybacks, but there is no doubt that the financial media increasingly likes organic growth from stronger sales and earnings.
The truth of the matter is that now, more than ever, fundamentals matter. All the money locked up in index funds is now starting to “crack.” The S&P 500 no longer has positive earnings growth, since almost half of its sales are from outside of the U.S. As a result, investors are flocking to smaller capitalization stocks with robust earnings and sales growth.
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.