Daily Gains Letter

U.S. Economy Shows Stability, But Real Growth Remains Elusive

By for Daily Gains Letter | Jan 21, 2013

DL_Mitchell_10One thing that has been really tempered since the subprime mortgage bubble and resulting financial crisis took place is expectations. The U.S. economy, Europe, and most other mature economies are in slow-growth mode, and this is going to last for a number of years, possibly right until the end of this decade. So, just like the unemployed struggle to find good-paying jobs, investors can’t expect a lot from the stock market.

Beginning in the third quarter of 2012, we saw a real reduction in revenue growth among many large corporations. Companies have been very good at cutting costs and maintaining earnings, but it was really noticeable that revenues were feeling the pinch—not just because of the U.S. economy, but also because of the economic mess in Europe and the slow economic growth in China.

Recent financial results from Oracle Corporation (NASDAQ/ORCL) and NIKE, Inc. (NYSE/NKE) were encouraging, and both companies are doing well on the stock market. But I think it’s important that stock market investors be wary and highly conservative in this current market. China is due for acceleration in its economy and its stock market has turned around. But practically, the U.S. economy is not ready to accelerate with so many structural problems related to debt and spending. And I’m not just referring to governments either; corporations aren’t spending their cash hoards, and this is holding back the U.S. economy.

I really have this sense that the stock market will chug along for another few months, then it could be really vulnerable, as data on recovery in the U.S. economy and China becomes inconsistent. The stock market has been ticking higher since its low in March of 2009, but the action has been choppy and, I have to say, discouraging for a lot of individual investors. One quarter the stock market soars; the next, it’s down significantly. “Inconsistency” is the term I use to describe the last few years, and I think we’re in for a lot more of it.

In terms of portfolio strategy, I really don’t see the need for investors to take a lot of action in this market. The U.S. economy is recovering, but it’s not really generating the kind of growth that it used to—real economic growth. I don’t think the stock market will do as well as it did in 2012. I don’t see how revenues and earnings can grow at a rate that justifies a double-digit return, which is why dividends are so important in this kind of environment.

I don’t like making stock market predictions, because I think that’s a fool’s game. I do think its probable that we will get a major pullback in the stock market this year and that this will be a good opportunity to add to dividend-paying blue chips. As for the U.S. economy, I think we’re just going to get more of the same—low and slow for the near future. Data on the U.S. economy has shown stability in the housing market, but no real change in the employment picture. A conservative investment stance is warranted this year. My expectations are low.

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