Wall Street has been incredibly focused on the short term. That’s why we saw such wild swings in the month of August. When you focus only on what’s happening right now, you lose sight of the big picture and where the biggest money can be made. That’s why investors want to use this opportunity to lay out a road map for the rest of 2011 and prepare for volatility, profit opportunities and anything else the market has in store.
Mile Marker 1: Trading Volumes
The first thing we can expect is for trading volumes to pick up. This happens every year as Wall Street professionals return from their long summer hiatus. And what we really need to see happen at this time is a drop in the Chicago Board Options Exchange Market Volatility Index (VIX). This index does exactly what it says: It measures the level of volatility in the markets.
As investors return to the market, we’ll see this level drop, which will attract even more investors, and that’s when I expect volumes to really increase. Later in the month, we’ll also get a “window dressing” volume surge as professionals scramble to make their portfolios more attractive before the end of the quarter. So it’s possible we might see another quick nine-day rally like the one that took place in June at the end of last quarter.
Investors aren’t eager to repeat the mistakes they made this summer and will be looking for stocks with strong earnings and solid growth prospects. Let’s face it: Most stocks look like a bargain right now, but the only way to know for sure is to look at the numbers, and investors are going to look at earnings. S&P 500 companies are in their 10th consecutive quarter of exceeding analysts’ expectations. That is another reason why I expect investors to benefit the most when volume returns in the coming weeks.
Mile Marker 2: Retail Sales to Rise Moderately
It was just a few months ago that rising food prices were causing protests, riots and social unrest around the world. With food prices on the rise, consumers had less money to spend on other goods and services, but food and energy prices have settled and will continue to moderate in the coming months. Specifically, I expect crude oil prices to consolidate now that Labor Day and the summer driving season are over; this will help put more money in consumers’ pockets.
The result will be an increase in retail sales, which, overall, will continue to slowly but steadily rise — especially for “must-have” consumer items. One stock capitalizing on this trend is the company that does it best, Apple (NASDAQ:AAPL). Apple’s iPhone 5 is due to arrive in stores in just a few weeks (Some rumors say as late as mid-October).
To say the new iPhone is expected to be a hit is an understatement. Apple’s customer base is extremely loyal, so many who have old iPhones will stampede to get the new iPhone 5. The iPhone 5 is expected to be thinner and lighter than the iPhone 4 and will have some nifty features, like an 8-megapixel camera. Since the new iPhone will operate on Qualcomm chipsets, the iPhone 5 is widely expected to be a 4G phone — which is what everyone really wants.
According to Apple’s own estimates and the components they have ordered, the company expects to sell 25 million units by the end of the year, which would make the iPhone 5 a smash hit and boost earnings. Since Apple is the largest company by market capitalization in the personal computers industry, it is the de facto market leader and remains a Wall Street darling. I expect the new iPhone 5 will be the hottest gift this upcoming holiday season, and its roaring success should help to propel Apple, its hundreds of suppliers and other technology stocks — and help to spark a great year-end rally.
Mile Marker 3: A Year-End Rally
After poring over all of the economic data, historical trends and a dozen other factors, I’m confident that, now that we’re into September, investors will see a strong market environment for blue-chip stocks.
That doesn’t mean the volatility is over. As I mentioned, retests are key to market bottoms, and some aftershocks are possible. But I think the biggest bouts of volatility are behind us and the stock market is well on its way to a full recovery.
The S&P 500’s earnings remain at a record high, and price-to-earnings ratios remain below all cyclical lows. So, clearly, the panic selling had nothing to do with corporations’ ability to grow sales and earnings, and when stock prices catch back up with earnings, we’re going to see stocks heading for new highs.
Plus, corporate buybacks and merger news will be huge catalysts to get investors in the buying mood. Just look at Google (NASDAQ:GOOG) and its 60% premium bid for Motorola Mobility (NYSE:MMI). And there will be plenty more of this activity in the months ahead. This is because companies are so cash-rich that they are buying back stock and buying up each other. Market volatility caused a flight to safety, which lowered corporate bond yields. This made rates so low that corporations decided to issue more debt on the cheap and use the cash to buy their stock. Because their stocks are such compelling buys right now, it was a no-brainer for them to make this shift. In fact, the late June rally we saw was sparked by corporate stock buybacks as companies rushed to finish their buying before the end of the quarter.
Take CF Industries Holdings (NYSE:CF), for example. This stock will be buying back $1.5 billion worth of its shares and quadrupling its quarterly dividend. CF has a return on equity of 23.6% and trades at less than nine times estimated earnings, so clearly it makes sense for management to buy its stock back and boost its underlying earnings per share and for investors to buy up as many shares as possible.
So far this year, U.S. companies have bought back an incredible $305.2 billion through Aug. 11, which eclipses the $300.7 billion of total stock buybacks in 2011 and 250% of total stock buybacks in 2009! I expect that stock buybacks and acquisitions will likely increase as more companies issue corporate bonds at ultra-low yields of only 2% to 3%.
