Recovery continues, particularly in China.
The “Super Bowl” stock market predictor forecasts a higher year for stocks if the NFC team or one of the original NFL teams beats the AFC team. This bit of alchemy has been correct 81% of the time, better than many professional fund managers This year, the NFC New Orleans Saints will play the Indianapolis Colts, originally an NFL franchise, thus the indicator forecasts a second straight up year even before the game is played.
With the market down 5% last week, investors should be grateful for any positive indicator. In normal markets, whatever they are (or were), a 5%-10% “correction” after last year’s nine-month advance would be historically normal. Another 5% drop, taking the Dow Industrial Average below 10,000 again, would still remain in the range of a normal “correction.”
With investor nerves still raw after the drop from highs above 14,000, another such drop would reignite fears of returning to those panicked days. Barring the unlikely event of a reversal of the global economic recovery, any such dip would be an even more attractive buying opportunity for stocks.
Interest rates remain near historic lows as the Federal Reserve continues the measures it began in 2008 as the impact widened of the financial crisis. Chairman Bernanke, a student of the Great Depression, kept a steady hand on the helm during those difficult times and it appears that the Senate will soon reconfirm him, hopefully by a bipartisan vote.
The market detests uncertainties and news of the Chairman gaining support in the Senate seemed to steady the stock market. Further steadying will need support from corporate earnings as economic news continues to indicate a moderating economic recovery.
Last year, the decline in the growth rate of the Gross Domestic Product hit a negative 5.9% rate in March, a far cry from the positive rates well over 3% that prevailed in recent years. The GDP then improved with the negative growth rate slowing to a minus half percent by August. By December, it was positive 2.7% but most economists expect this to ease in 2010.
Wall Street will be obsessing on forthcoming economic reports but the real guidance to stock performance will come from quarterly earnings reports. The S&P 500 stocks are trading now at about 16 times forecast earnings for 2010. If they are able to meet or beat their numbers, as some are already doing, stocks have good prospects for resuming their gains.
Johnson Controls (JCI-$30), a Milwaukee-based manufacturer, is placed nicely to benefit from a recovering economy. The company is expending its traditional business of making automobile interiors into both China and India, where it recently opened new facilities to supply major carmakers in each country. Its environmental controls business was off slightly in 2009 but the company sees renewed growth in this sector. Its auto battery lines are evolving with new markets for hybrid cars.
The company beat forecasts and increased its earnings projection for 2010 to $1.75, a forward P/E of 17. Over $2.00 is in sight for 2011, an overall quite reasonable valuation. Its yield from a rising dividend is 1.6%. Debt is moderate and its proven ability to compete successfully in overseas markets makes it an attractive new buy.
As Johnson illustrates, China is an increasingly important factor as a market, supplier and financier. It will replace Japan this year as the world’s number two economy. This success contrasts with its per capita income, where it ranks somewhere around number one hundred. Some economic numbers from China are as unreliable as if they were prepared with the help of Bernie Madoff, but its overall momentum is undeniable with its latest quarterly growth around 10%.
Closed end bond funds provide good placeholders pending clearer direction. Credit Suisse Income (CIK-$3), still pays over 9% in monthly dividends.