Don’s Outlook 10/23/09
One week after crossing the important psychological barrier of 10,000, the Dow Jones Industrial Average seesawed its way through the week. The Dow has returned to this level on the back of fiscal stimulus and accommodative monetary policy, and both of these will remain supportive in the short term. The bulk of evidence also points to recessionary pressures ending in the developed countries, with growth continuing to accelerate in the emerging nations.
Analysts and investors are currently poring over third-quarter financial statements that corporations have issued so far this month, looking for signs that revenues are improving or that expectations for growth are broad based. Now that 50 percent of firms have reported their results, 77 percent of those companies have beaten their estimates, a much greater number than was expected just three months ago. The strong results are a mix of cost cutting, rising demand, weaker dollar, and high energy prices. Most important, revenue is also increasing on a quarterly basis; the year-over-year comparisons are still down, however.
Some of the sectors with exceptional yearly results include financials and consumer discretionary firms, which were two areas hurt most at the outset of the crisis. Over the past month, this list also includes technology, healthcare, and materials companies. Although automotive firms have benefited greatly from the stimulus, I am concerned over their outsized gains in the face of a narrowing rally. Therefore, I am selling our Fidelity Select Automotive (FSAVX) position and adding the profits to Federated Strategic Value (SVAAX), a broader fund that seeks both income and capital appreciation by investing in high-yielding, undervalued shares. I believe we have moved beyond the tidal wave of dividend cuts, and investors will once again gravitate to the stability of income generating firms.
The US dollar has yet to reverse its downward trend as investors borrow dollars in order to invest in higher yielding currencies and foreign equities. This is expected to continue until the US government puts its financial house in order or raises interest rates, which is not likely to happen until job growth returns. This is one reason why I expect to move more assets toward international equities, particularly Asia, where countries are growing due to a rising middle class and higher wage earners.
