June Market Outlook
Many stocks and major indexes have been stuck in trading ranges for much of the year. The reasons for the lackluster performance include: the dollar and its impact on revenue and profits, low oil prices and weak energy industry earnings, valuations, anticipated rate increases by Fed, Grexit.
Will prices break out up or down from these trading ranges?
- Low oil prices should be a net positive for the U.S. economy, especially for the consumer. We are seeing oil prices rise off their March lows.
Oil prices are expected to be higher this summer, but prices normally fall after summer vacation and hurricane season.
- The U.S. has low inflation and that could help keep interest rates low. Low inflation gives the Fed more time and flexibility in raising interest rates. This is good for the economy and asset valuations. Every time there is confirmation that interest rates may stay low, the market has a strong rally.
- Job growth is expected to continue in 2015.
- Central banks around the world have been pursuing stimulative efforts to help their economies.
- From 1997 to 2012 the number of corporations publicly traded on American stock exchanges has dropped about 44%. Less supply could mean higher prices.
- Shareholder perks like share buyback programs, spinoffs and dividend increases are expected to continue in 2015. There are signs that this trend is slowing, especially buybacks.
- Mergers and acquisitions and private equity companies buying companies are expected to be active and should help stock valuations.
- The economies in Europe and Japan are showing signs of improvement.
- The market has been rising since 2009, longer than most bull markets. The slow growth from this economic cycle could cause this market cycle to last longer than the average, and could last at least another year.
The bearish case includes:
- Earnings forecasts are coming down, especially for energy companies, and for companies that have significant sales internationally. The strong dollar makes U.S. goods more expensive. Earnings are expected to improve by the end of the year, and into 2016. See forecasts below.
- The Fed may raise interest rates. Raising interest rates have been disruptive to the markets in the past, but less to the economy.
- Cyber-attacks could disrupt our economy and markets.
- The oil price collapse could cause some oil producing nations (Russia, Iran, Venezuela…) to take drastic measures. What measures they take is anyone’s guess, but desperate people do desperate things.
- The conflicts between Russia and the Ukraine, Syria’s civil war, Iran’s nuclear weapons ambitions and negotiations, ISIS in the Middle East, Sunnis versus the Shiites remain and are unresolved.
- Our Federal Reserve has very few effective bullets to use if we have a major financial crisis.
- Black and grey swan events. Events that have a low probability, but if they happen would have a big impact.
Below is a consensus earnings forecast for 2015:
I circled S & P 500 2015 earnings growth, and the market reflects the earnings expectations for 2015.
Energy’s 2015 earnings’ outlook is dismal.
However, 2016 earnings forecast looks much better:
Fortunately 2016 earnings estimates for the S & P and energy look much better.
The market does have a chance to break out of its current trading range.
Below is my current forecast for the S & P and Dow 30:
Source: Consensus Earnings Estimates Thomson Reuters, Barron’s
Markets appear fairly valued for now.
2016 looks better with close to a 10% total return (including dividends).
Valuations and Price Action
In 2009, stocks were inexpensive, prices were low, and dividend yields were much higher.
Below is a chart of the S & P dividend ETF, symbol SDY:
SDY is the type of recommendations our Baby Boomer service normally recommends.
In 2009, the price was around $22 the P/E was moderate, and the dividend was around 5%. Also, when buying at the start of an economic cycle, and bull market investors should be more aggressive and invest long-term
Today the stock is up about 250% from its 2009 lows, the dividend has shrunk to 2.2% and the P/E is an expensive 20. I have recommended SDY in the past. Would I recommend SDY today? NO!!!
Notice that the stock has been going sideways for about 10 months. The pattern is called a symmetrical triangle, a neutral pattern. Participants are buying the pullbacks but selling the rallies. It could also be considered a bearish topping pattern as it seems as it is running out of energy after a great bull run.
SDY will probably move sideways as it grows into its expensive valuation.
Pay attention to valuations and its price action, stock chart.
I do prefer stocks that have dropped, are inexpensive, pay a good dividend, and have good upside.
Occidental Petroleum (OXY) is the type of stock I would recommend today. I did recommend OXY in our Gold and Energy Advisor service earlier this year.
Below is a chart for OXY:
From peak to trough, OXY was down around 30%, bear market territory.
OXY last year had a topping pattern that lasted about seven months.
Prices are currently basing, normally the last phase of a bear market. Bases are like diving boards, the shorter the base, the shorter the bounce, next move. The longer the base the bigger the bounce, next major move. OXY is building a strong, long base.
OXY’s dividend is about 3.9%. Its enterprise value (market capitalization plus debt) of its proved reserves is about $20 per barrel, this is relatively a good value. When oil prices are close to $100, proved reserves average acquisition price go for about $35 a barrel.
I look for companies to recommend like OXY and avoid investments like SDY in today’s market.