How to invest in view of record-high Dow
Where to put your money? David Rosenberg has four ideas
new
March 5, 2013, 4:03 p.m. EST
By Jonathan Burton, MarketWatch
SAN FRANCISCO (MarketWatch) — It’s “Green Tuesday” on Wall Street as the
Dow Jones Industrial Average closed at a record high. Investors, give
credit where credit is given. As we prepare to celebrate the bull
market’s fourth birthday, the biggest slice of cake goes to Federal
Reserve Chairman Ben Bernanke.
Indeed, one stock-market veteran who isn’t so impressed with the Dow’s
latest milestone is David Rosenberg, the chief economist and strategist
at Toronto-based investment manager Gluskin Sheff and Associates Inc.
Rosenberg goes about “setting the record straight” in a Tuesday research note written before the Dow
DJIA
+0.89%
finished in uncharted territory. Check out all the day’s record-breaking action via Markets Stream.
Rosenberg notes a tight 85% overlap between the direction of the stock
market and the (expanding) size of the Fed’s balance sheet.
“The reality is that even though the economy has not gained much
traction four years into a soft recovery phase, the Fed has exerted a
tremendous impact on the markets — as it always had in the past,”
Rosenberg points out.
Gluskin Sheff research suggests the Fed’s highly accommodative policy of
quantitative easing has padded 300 to 500 points on to the Standard
& Poor’s 500-stock index
SPX
+0.96%
, which itself is a percentage point or so from an all-time high. Market Extra: Is the new Dow high a rally point or a ceiling?
“Contemplate that,” Rosenberg writes. “The Fed’s incursions have been so
powerful that the bulls have Ben Bernanke to thank for nearly half the
rally from the lows during this four-year cyclical run.”
The bulls could keep charging, given the absence of inflation from an
economy that is still on the long road to recovery. Rosenberg, who is
often mistakenly identified as a “permabear,” offers four “high
conviction” ideas for investors wondering where to put their money now
that the Dow is mowing ‘em down.
1. Come to income
Income matters most, Rosenberg says. Capital appreciation is not the
main goal of U.S. baby boomers in and near retirement — and what more
than 80 million baby boomers want, baby boomers get.
Unfortunately, income is scarce, “especially secure income,” Rosenberg
says. Income-driven buyers accordingly will pay higher prices for
predictable cash payments.
Dow blasts past record high
With the Dow on track to set a new record, Peter Cardillo, chief market economist at Rockwell Global Capital, tells MarketWatch Radio's Joan Doniger that he thinks the markets will continue to hum along at least for another six weeks or so.
Where to find income? Stocks, Rosenberg says, matter-of-factly. Yet this
is not news. Looking to large, global companies for steady, growing
dividend income is a saturated idea, a “crowded trade.”
Rosenberg disagrees. As an example, he singles out the health-care and
consumer-staples sectors, two noncyclical areas of the market that have
outperformed the S&P 500 so far this year. Stick with noncyclical
dividend payers, the strategist advises.
2. Cash flow is king
A second theme is to invest in companies that can profit in a time of
disinflation. Sluggish demand, high unemployment and oversupply is
keeping a lid on U.S. economic growth, Rosenberg says. “Real disposable
incomes per capita are lower than they were a year ago,” he notes.
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Why the Dow doesn't miss Apple
The Dow has not needed Apple, till recently the darling of the stock market, to scale the heights.
In a typical disinflationary environment, cash is king. But with cash
offering virtually no yield, Rosenberg says, cash flow is king. “As
cautious as I am over the macro outlook, at current yields it might be
better to opt for cash-flow strategies” than to keep your money in a
bank CD or money market, he adds.
3. Stick with corporate bonds
The third direction in which Rosenberg steers bulls is toward corporate
bonds, which he says have “significant potential to deliver positive
returns in 2013 without taking on equity-like risk.”
If you are trying to decide between a corporate bond and company stock,
let Rosenberg help. The bond, he reminds investors, is a claim on the
quality of the firm’s balance sheet. The stock, on the other hand,
reflects the quality of the company’s income statement.
“I have much more confidence over the quality of corporate balance
sheets right now and have little visibility, if truth be told, over the
outlook for corporate earnings,” Rosenberg notes.
4. Shop for stocks
As for stocks overall, Rosenberg says that Gluskin Sheff’s investment
team has added some exposure to equities — U.S. large-cap dividend
growers in particular.
“But overall,” he says, “we remain quite defensive in posture and do not
have tremendous conviction over the longevity of the most recent
rally.”
This is not March 2009, Rosenberg cautions. Then, corporate earnings had
bottomed. The resulting rebound lifted small caps and higher-risk areas
of the market.
Now, Rosenberg says, robust corporate profits are harder to find.
Investors, therefore, should look to defensive sectors and companies
with regular, stable earnings and cash flow.
Before anyone gets euphoric, this is a good time to dust off an old Wall
Street chestnut: When earnings growth is abundant, the market prices it
like water. When earnings growth is scarce, the market prices it like
diamonds. Just be careful about the price you pay; otherwise you’ll pay
the price.
Jonathan Burton is a MarketWatch editor and columnist based in San Francisco. Follow him on Twitter @MKTWBurton.
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