Entering into the second quarter we have no idea how the market may react and where it may head in the short term. Our view always is much longer than a quarter – three to five years at a minimum. While the market has been performing well, the first quarter earnings reports are sounding a note of caution. Year-over-year increases were lower and more companies reported disappointing revenue growth, so it can be assumed that any gains made were from cost cutting efforts rather than actual true revenue growth. This may not set off alarm bells, but investors are increasingly looking to companies and asking, “What’s next and where is revenue going to come from?”
Another important element to note in the coming months is the historically slower Q2 and Q3. As summer vacations hit the US and Europe, not only is the domestic market less active with fewer participants, but from a sales standpoint, the sales numbers usually decline when compared to the prior quarter, as businesses tend to slow down in spring and summer months.
A strong economic indicator that we will continue to monitor this quarter will be the jobs report, as it is a good proxy on the direction of economic growth. Ideally, we’d like to see 200,000 jobs added each month.
With this in mind, we continue to recommend that investors look ahead to value plays. Our economic philosophy has always been to consider sectors and stocks that have underperformed because they tend to yield better returns over the long term. These “unloved” areas are typically mispriced and overlooked by investors; however, if they have a strong balance sheet and/or if management has plans to drive efficiency into their business, they can be beneficial investment plays.
Areas that we favor in today’s environment include the industrial and tech sector, and some specialty retail. In addition, higher dividend-paying stocks including utilities, health care and consumer staples companies have continued to be attractive to investors and have gone up strongly to date this year.
Make sure to check back to Ramparts, as we continue to offer our market outlook throughout 2013.