INCLINE VILLAGE, Nev. — October was the market’s best month in years and certainly very welcome after the dismal summer. Why? There are several reasons.
With few exceptions, earnings reports have been far better than expected (75 percent of companies beat). Caterpillar’s earnings provide a good example. CAT’s first nine months were better than any full year in its history, and the outlook is good for next year.
Unfortunately, CEOs remain cautious about 2012, which is why few plan to hire. They cite the usual worries about Europe and the economy, but there is also a tendency to play it safe. It’s better to be subdued and be surprised on the upside later rather than be too optimistic and then underperform. And corporations, loaded with cash, are playing it safe. Expect them to use more cash for dividend boosts and share buybacks.
There’s more. It’s hard for stocks to fall when investors are overwhelmingly bearish. Ordinary investors have been turned off by the market’s volatility and string of triple-digit moves. They feel the game is stacked and one can understand why.
Professionals, being close to the market hour by hour, can also be too focused on all that is wrong right now and indifferent to the many long-term positives. Until this rally began, they were so pre-occupied with Europe’s problems and China’s slowing growth that they ignored compelling valuations, increasing earnings, rising productivity and good yields.
Many convinced themselves that a recession is at hand, the evidence to the contrary notwithstanding. When sentiment is so one-sided, it’s almost a certainty that the market will move the other way ... and it did.
A reason to be optimistic as we move forward is that there is really no alternative to stocks for growth and fewer and fewer alternatives even for income. Consider the latter now. Due to the Fed’s low-rate policy, savers are earning close to nothing in CDs, money-market funds and Treasurys.
As I’ve discussed in previous articles, the best means of earning a decent return is to invest in preferred stocks, high yielding stocks, and utilities.
— David Vomund is an Incline Village-based fee-only Registered Investment Adviser. Information is found at www.ETFportfolios.net or by calling 775-832-8555. Past performance does not guarantee future results. Consult your financial adviser before purchasing any security.