Through Monday, August 20, markets have been up across the board. The S&P 500 (^GSPC) has gained just over 11% year-to-date, 10-year Treasuries – even after their recent “correction” – have gained some 4%, and gold has risen some 2.5%. Most of the gains have been realized on investor hopes that “things aren’t quite as bad as they sound.”
Despite a recent spate of reasonably strong corporate earnings, revenue growth has slowed substantially. My firm expects fourth quarter revenues (released this coming January) to grow a meager 1% year-over-year. The fourth quarter of 2012 will mark the first quarter since the financial crisis ended in 2009 when earnings and revenue comparisons will be difficult. In a world where analysts continue to bring down their earnings estimates, revenue growth is slowing, the impact of monetary stimulus is fading “risky” assets such as commodities, and equities are unlikely to fare well. Moreover, so far this century the first quarter following an election year can be very challenging.
Looking back further, the figures improve a bit, but that performance was against the backdrop of strong job creation, budget surpluses and strong global economic fundamentals (i.e., there was double digit GDP growth from China, India, and Brazil).
We expect the current market “melt-up” is likely to continue through early October, perhaps even past the election if investors are buoyed by a Mitt Romney win. However, with global headwinds smacking investors in the face during January, we caution that investors should prepare to act decisively.
As we look ahead to the first quarter, we recommend slowly and deliberately raising cash positions and sticking with or moving into equities that offer safety. Next year may not be lost to negative returns for the full year, but I believe it sure will feel like it during the first quarter. The one area of the market we believe could significantly outperform are high-quality dividend paying stocks, particularly if a the tax rate on dividends remains at or below the capital gains tax rate – which we believe they will.
