I’ve been counseling folks for the past several weeks to take their time buying stock — and to do most of their shopping on down days.
That advice still applies. The bulls have displayed some pretty good muscle since the August 25 bottom, but they’ll need to do more groundwork between now and early October if there’s to be any chance of a Q4 rally back to the year’s highs.
On the economic side of things, the news has clearly brightened in the past few weeks.
Earlier this month Markit released the final results of its August composite survey of European purchasing managers in both the manufacturing and service industries. The number (54.3) beat a preliminary estimate of 54.1, touching the highest level since May 2011.
At home, the Federal Reserve’s Beige Book painted a largely optimistic picture of the U.S. economy, with housing and auto sales singled out as particularly bright spots.
On the employment front, a recent ADP report showed the private sector adding 190,000 new hires in August, while Thursday’s weekly tally of first-time jobless claims (282,000) continued to point to healthy demand for labor.
Yet this run of encouraging statistics can only carry the equity market so far.
Last month’s plunge dealt a serious blow to investor confidence. To repair the psychological damage (and bring back the buyers on a consistent basis), a period of stabilization will be required in which the market tests the August lows—probably more than once—and ultimately leaves them behind.
For now, I suggest that you focus any new stock purchases on the strongest and safest names — preferably outfits with fat dividends, which help dampen price volatility.
Since most of a REIT’s dividend is taxed at high “ordinary” rates (rather than the lower rate that applies to “qualified” dividends), you should tuck Realty Income and Ventas into your IRA or other tax-sheltered retirement account if possible.
You can ignore doomster prophecies that “rising interest rates” will ruin high-dividend stocks like these. If the financial tremors of the past few weeks have sent any message, it’s that rates will be rising much more slowly — over the next year or two, and quite possibly longer — than either Wall Street or the Federal Reserve had expected.
For fund investors, my top buy at the moment is WisdomTree Total Dividend ETF (DTD). DTD weights its portfolio according to the dollar amount of dividends paid by each company, ensuring that your holdings are always concentrated in large, household-name businesses.
Finally, a quick note on gold. It’s unsettling that the Midas metal has failed to sustain much of a rally despite the turmoil in global financial markets over the past few weeks. Is gold anticipating that the world’s central banks will ultimately lose their battle to revive inflation?