Stock Market Ready for Liquidation?

By George Leong

I advise you to look at buying stocks—but not quite yet; the time for buying hasn’t arrived. Just like a fire or liquidation sale at a retailer, the best buying opportunity in the stock market is when the discounts are at their heaviest. We’re not at that point yet.

As I have noted in my commentaries following the Federal Reserve Chairman’s recently proposed exit plan for the Fed’s bond buying and its effect on interest rates, the stage is set for the stock market to readjust to the norm. By this, I mean the rapid gains we have seen in the stock market over the past few years—specifically this year—are soon to be a thing of the past.

With the Fed planning to scale back on its monetary stimulus and, in turn, drive up bond yields, I do not envision a massive and sustained period of selling in the stock market, but instead a brief opportunity to buy some discounted stocks sometime on the near horizon.

Some are calling for a bear market to surface, but I don’t agree. While the Fed’s money printing may soon be over, as long as interest rates remain low and the economic renewal is actually in place, we could see an upward move in corporate America and the stock market—but it won’t come easily.

With the second quarter coming to an end this Friday, the focus will shift to the earning season, when I’ll again be looking at the revenue side to see if there’s any progress. Recall this year’s first quarter, when revenue growth in corporate America was weak and numerous companies fell short on revenues. The reality is that companies need to produce in order to support the equities prices.

Let’s take a look at the research by FactSet in its recent commentary (source: “Earnings Insight,” FactSet Research Systems Inc. web site, June 21, 2013):

Revenues for S&P 500 companies are estimated to grow a dismal 1.2% in the second quarter, down from a much higher 2.7% at the end of the first quarter. This slow growth doesn’t get my vote of confidence for corporate America; but it does indicate the continuation of low interest rates.

Earnings in the second quarter are estimated to grow at an anemic 1.1% versus the 4.3% seen at the end of the first quarter. This again is not encouraging, and suggests the U.S. economy is still fragile. In fact, based on the FactSet data, 87 S&P 500 companies have already provided negative earnings views—against only 21 with positive views.

The sectors with the weakest decline in earnings expectations include the materials (5.7% decline in expected earnings), information technology (down 6.3%), and the industrials (down 2.1%) sectors.

The financials sector, which I continue to like, is positive, expecting 17.7% earnings growth.

The second-quarter results could be messy for the stock market, but if stocks continue to correct, I would begin to look for some buying opportunities. If you want to take advantage, have some cash available.

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