Don’s Outlook 1/15/10
If you missed last week’s commentary, I wanted to quickly highlight the recent recognition of my flagship newsletter, the Fidelity Independent Adviser, by Mark Hulbert. For more than 10 years, The Hulbert Financial Digest has independently tracked my newsletter model portfolios and has the unique ability to verify my long-term track record, as well to compare these results to hundreds of other advisers. My newsletter was one of seven to pass his criteria for risk-adjusted returns for several periods over the past 10 years. If you would like to read the article, please click here to visit the Barron’s web site.
The stock market is receiving accolades of its own, or at least a growing chorus of fans, as evidenced by sentiment indicators such as the Investors Intelligence poll. This poll indicates that a high level of bullishness has returned among investors—one not seen since the heady days of 2007. This coincides with the risk-appetite measurements that I have discussed in the past, and the first two weeks of trading in 2010 have accentuated these extremes. By Thursday, global markets had climbed another 3% on average, with many of last year’s relationships resuming their trends—such as the U.S. dollar weakening, commodities rising, and developed and emerging-market stocks appreciating.
Despite the fact that stocks have launched 2010 decidedly into positive territory, I caution investors against becoming either too greedy or complacent. Although 2009 ended with strong gains, this year will most likely test the strength and stamina of the economy and the market. It will also be a year of policy change and continued uncertainty. Nevertheless, I am expecting several positive trends to continue, such as improved economic readings, a firming labor market, and sustainable growth in global economies.
The fourth quarter earnings season got underway this week, and judging by early guidance, companies should log surprisingly positive results. In fact, this should be the first quarter in nine that year-over-year earnings growth is positive. Of course, one reason is that earnings plummeted in the fourth quarter of 2008, making year-ago comparisons easy to beat. This was especially true of financial companies, whose earnings were devastated by the credit crisis and the stock market collapse. But the cost cutting that ensued across all sectors means that any revenue growth will considerably boost corporate profits. In addition to financials, the technology and consumer discretionary sectors have rebounded considerably from the standpoint of earnings.
Unlike the outset of the previous two earnings seasons, however, the stock market has already rallied in anticipation of positive results, meaning that gains over the next several weeks will be muted if significant positive surprises do not materialize. Nevertheless, valuations remain modest from the standpoint of forward-looking P/E ratios and interest rates are at historically low levels, providing even more reason for investors to bid up quality, dividend-paying stocks over the course of 2010.
