What volatility?
Stock prices have slipped a bit while earnings forecasts have gone up. The result is an enhanced shopping list of quality stocks. With the U.S. economy beginning to pull ahead from the Euro zone and China putting on the brakes to ward off inflation, the prospects continue to improve for a significantly higher stock market by year-end.
Investors have not lacked attention-grabbing financial news in recent weeks. Shady dealing in high places and a major oil spill were followed by currency upheavals in Europe. These inspired a run of three-digit changes in the Dow Industrials, punctuated by a still unexplained thousand point dive in a few minutes. After all this sound and fury, the Dow is ahead a rousing 1% for the year-to-date.
The impact of struggling economies in Southern Europe on the overall global economy is a continuing story. Its impact on stock markets has been exaggerated, aided by frequent television reruns of rioting in Athens as background for unrelated stories of market fluctuations. Economic integration of Europe has been a long and largely successful work still in progress. Its common currency is an integral but not absolutely essential element while its liberalized cross-border trading remains intact.
The root cause of the Euro crisis lay in the still uneven global recoveries from the worldwide financial crisis. This now seems recognized as starting from excess borrowing everywhere, particularly in U.S. subprime mortgages, correction from which remains a work also still in progress.
The overriding catalyst remains the global economic recovery. This will continue with regional fits and jerks so long as the world continues the process of liberalized free trade. China, the elephant in the room, has been missing from the financial news while we were being shown riots in Greece. It seems currently to be on some sort of retreat while it rethinks the impact of its own success on inflation and its currency. It will be back in the news, demanding that attention be paid.
Meanwhile, weakness in the broader European market makes shares in GlaxoSmithKline (GSK-$34) more attractive. This is a substantial global pharmaceutical company with $42 billion in sales and a 5% dividend yield. Its debt load is high and it comes with the usual burden of uncertainties from drug regulations and litigation but offers good value with interesting new drugs in its pipeline.
Oil prices dropped 20% over the last month, apparently due to concerns from a weakened Euro zone economy. This seemed a bit much for such a global economy and prices are edging up again. Occidental Petroleum (OXY-$82) raised its dividend for the eighth straight year. Typical of its widespread activities, it is currently in a new venture with Korea Gas Corporation to develop a large field in Iraq. I continue to recommend building stock portfolios around quality core companies like Oxy that have proven their abilities to succeed in volatile markets.
Among consistent dividend boosters, less well-known Sigma-Aldrich (SIAL-$54) has provided shareholders annual increases for 28 years. The St. Louis based company has over $2 billion sales worldwide of over 130,000 different products to support scientific research. Both sales and earnings are growing at around 10%, debt is reasonable and its valuation leaves room for growth.
Market volatility is producing more heat than light. Investors who stick to growing companies can use recurring flurries of panic to enhance their returns. As Kipling recommended, keeping “your head when all about you are losing theirs” works well in investing.