Why I Think You Can Still Ride the Market Higher

By George Leong

I have to admit that my hat’s off to the U.S. economy. Outcomes in the first half of the year were far better than I expected. And the second half seems to have started where the first half ended—on a high note.

I’m not complaining. There have been nice trading profits made in the upswing, and—like any smart investor—I have taken some profits off the table, especially in cases where the advance has been too big not to cash in on it.

And as we move into the second half of the year, the trading and direction will continue to be focused on the Federal Reserve and whether the central bank will indeed begin to taper its bond buying stimulus, as it has indicated.

The creation of 195,000 new jobs in June was more than expected, and that number clearly gave the stock market some confidence. But what really made traders happy was that the unemployment rate stabilized at 7.6%. The feeling among many is that as long as the jobless rate holds above 7.2%, the Federal Reserve will hold off on tapering until 2014, continuing to boost stocks.

The Federal Reserve has done a great job in driving up the overinflated housing and stock markets by supplying easy money. As I have said on numerous occasions, while the economy looks strong at first glance, cracks will begin to show when the massive buildup of the national debt and the burdensome consumer debt become more evident as interest rates ratchet higher.

The mountain of debt created by the Federal Reserve will become a major issue—count on that.

Of course, we’ll see signs of what’s really happening in the economy as the second-quarter earnings season progresses. Corporate America will need to deliver results or at least show some progress. Since the Federal Reserve has provided cheap money for so long, all eyes will be on earnings reports to see if there is any improvement. If there is any good news in the earnings season, look for small-cap stocks to outperform.

But the news doesn’t actually look like it will be that great for the second quarter. Earnings are estimated to grow at an anemic 0.7%, compared to 4.3% at the end of the first quarter. That suggests the U.S. economy is still fragile. According to FactSet, 87 S&P 500 companies have already provided a negative earnings view, compared to only 21 positive. (Source: “Earnings Insight,” FactSet Research Systems Inc. web site, July 5, 2013.)

According to my research, the weakest declines in expected earnings include the material (down about 7.9%), information technology (down 6.5%), and industrial (down 2.2%) sectors.

The top sector is expected to be the financial sector (up 16.8%), which has provided strong leadership so far this year, a trend that will likely continue—so I would buy some bank stocks and thank the Federal Reserve.

The key metric to monitor with all stocks will be revenue growth. Companies need to grow revenues to drive earnings—cutting costs won’t do it alone.

The reality is that the time to invest is still now. Ride the stock market gains as the Federal Reserve continues to provide an ideal climate, but realize that the party will eventually end.

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