It’s A Large-cap, Dividend-paying Market—the Economy & Commodities Have Made It That Way

May 30, 2011 - PRLog -- I fully expect large-caps to outperform small-caps this year, as higher raw-material costs will be better absorbed by big companies that have more room to adjust prices without affecting the bottom line. It’s going to be a choppy year for the economy and the stock market, and we could, in fact, get just range-bound trading around current levels. The stock market’s already gone up, and there’s no catalyst as yet for institutional investors to jump on any new bandwagon.

As the main stock-market indices have been trendless over the last several weeks, there has been a noticeable migration to dividend-paying large-caps. As I have noted in previous columns, in the absence of any definable trend, big investors would rather have the income as a way of beating the rate of inflation. I don’t think any major equity investor expects the S&P 500 Index to take off to the upside anytime soon. In fact, Goldman Sachs just cut their year-end target on the Index to 1,450 from 1,500. The Index is currently trading around the 1,330 level, which portends about a nine-percent gain for the rest of the year. If this happens, we would get about a 15% return on the Index for the year, excluding dividends. While the marketplace seems lackluster, that would actually be a very respectable rate of return for the stock market.

Going forward, the broader market will continue to gyrate on the news of the day, but fundamentally, we have to listen to what corporations are saying about their businesses. If there’s one thing we’ve learned over the last several quarters it’s that not all industries are experiencing the same level of economic growth. The uneven performance in the economy is actually holding back investor sentiment, and it’s why there aren’t many lofty calls for higher share prices.

Basically, I think the stock market is fairly valued right now. Investors have taken in all the expectations for recent and future earnings, as well as all the current economic data. The stock market isn’t expensively priced, and it isn’t cheaply priced. It’s fairly valued, which is why there’s consolidation around the current levels.

It’s also fair to conclude that higher commodity prices are trickling down throughout the economy and that they have tempered growth and sentiment. The price of oil, in particular, really seemed to get out of whack with the economic reality of the marketplace. Like the stock market, oil around $100.00 a barrel is fairly valued. It says to me that speculators expect steady growth in demand for the commodity, but nothing too robust.

If we get incremental returns from stocks for the rest of the year, dividend payments will be the key to outperformance. Large-caps have the most to benefit from the current state of the economy, and especially those with strong track records of increasing dividend payments to stockholders.

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