Dow 12,000? or Dow 9,000?
Stocks gained during the first week of the New Year, the traditional “January indicator” that indicates a higher close for the year. The Dow Jones Industrial Average was up almost 2,000 points in 2009, a 19% gain after its 34% plunge in 2008. With the unemployment rate at 10% and the economic recovery only taking baby steps, the optimism reflected in these gains against the grain probably means another up year.
Company earnings will have easy companions to the depressed earnings of last year and I expect a recovering economy to push the Dow through 12,000 by the end of this year. Investors are still understandably skeptical after the trials of the past two years and I would not be surprised to see it also dip back below 10,000 on the first signs of bad news.
These will probably come as the initial energy of the recovery falters, probably renewing calls for a second shot of fiscal stimulus. In an election year, that promises a tough fight ahead but a double-digit unemployment rate will demand that attention be paid.
Short-term interest rates are likely to remain at their present levels near zero until the jobless rate comes down. Long-term rates are already moving up but this probably represents a slow rebirth of confidence as investors move from bonds to more growth-oriented securities.
Stock investors can expect more volatility but this can be used to advantage provided they stick with companies whose balance sheets are strong and who can grow earnings during a tenuous recovery. Solid companies like IBM (IBM-$130) and 3M (MMM-$84) will do well. As the recovery advances, so will more cyclical growing big companies like United Technologies (UTX-$71) and FedEx (FDX-$86).
China will play an increasing role in this country’s economy and its stock market. Already the world’s biggest steel maker and leading auto consumer (in units), it passed Germany in 2009 to become the largest over all exporter. This reflects the abilities of its agile manufacturers to take advantage of its enormous labor force. Labor is cheap, too, as it ranks 130th in the world in income per capita.
China continues to import iron ore, oil and other commodities, providing a market for companies in those sectors. Its repressive government has been successful in managing its growth but internal strains in transitioning its hundreds of millions still on peasant incomes will bring inevitable strains. The West’s strengths will continue to be its incentives to innovations reflected in companies like Apple (AAPL-$208), which leaves only a small part of its profits in China, where its iPhone is assembled.
The possibility of internal strife and of arbitrary government interference with so-called private companies in China continues to make me wary of excessive weighting in its stocks. In the current climate, I prefer its larger companies. China Life Insurance (LFC-$72) has many earmarks of a traditional growth stock and Sinopec (SNP-$86) is a large ($183 billion sales), reasonably valued energy and chemical company.
PetroChina (PTR-$128) is better known but its stock price seems subject to speculative excesses. At one point, its market cap was the largest in the world, beating Exxon Mobil even though its sales are $132 billion, less than half of Exxon’s and even less than Sinopec, whose market cap is only a third of PetroChina.
In this country, the probable passage of a healthcare bill should encourage higher stock valuations in the medical sector. Merck (MRK-$38) will be gradually improving earnings as it absorbs Schering-Plough. Its P/E is only 10 and it yields almost 4%. Life Technologies (LIFE-$52) and Qiagen (QGEN-$22) are faster growing suppliers of tools and solutions for the global biotech industry. Adding innovative stocks like these to a portfolio grounded in solid blue chips is sensible.