January 2012 Peak View Newsletter
from Jim Onorato
For the calendar year 2011 the U.S. stock market was essentially flat. Large U.S. stocks were up slightly and smaller U.S. stocks declined slightly. Overall our stock market ended the year pretty much where it began despite all the volatility that unnerved investors throughout the year. It was like riding a roller coaster in an amusement park – lots of ups and downs, twists and turns, and in the end the ride ends up exactly where it started. Although the U.S. stock market was flat, virtually all of the other stock markets around the world declined significantly. As a result portfolios that had any exposure other than large U.S. stocks were off for the year.
Despite the fact that stocks were flat for 2011, the large domestic companies continue to report increases in both top and bottom line growth. Manufacturing utilization and other measures of economic activity continue to improve, though slowly. In fact while the stock market has been flat for the year, earnings have grown by 20% making stocks a much better value than they were a year ago. In my nearly thirty years in this business, the only other time stocks were cheaper than they are today was in 1982, the year I began my career. There appears to be many catalysts in place that would suggest a good year for stocks. First and foremost stocks are cheap by historical measures. Secondly, investor pessimism is very high. As odd as it may seem, stocks tend to rise when no one is optimistic that they will. One thing that I have learned over the years is that investing is very counterintuitive. When everyone is euphoric as they were in 1999, the party is usually about to end. And lastly stocks are yielding more in dividends than bonds.
Consider this. The ten year Treasury bond is currently yielding 1.9%. A $100,000 investment in the ten year Treasury bond will produce $1,900 per year in interest and an investor will receive his $100,000 principal repayment at its maturity. Johnson & Johnson common stock is currently yielding 3.5% providing $3,500 in annual dividends on a $100,000 investment; nearly double the income of a ten year Treasury bond. And that is in the first year. Unlike bonds that pay a fixed interest rate, Johnson & Johnson has raised its dividend every year. JNJ’s annual dividend has more than doubled over the past ten years. If JNJ continues to raise its dividend at the same rate as they have in the past the original $100,000 would be generating $7,000 in annual income ten years from now vs. the $1,900 in fixed interest on the ten year Treasury bond. Granted stock prices can and will fluctuate, but personally I believe that Johnson & Johnson (founded in 1886) will still be in business ten years from now earning considerably more than it is today and paying a significantly higher dividend. There is a lot of money on the sidelines earning virtually nothing on CD’s and bonds that I believe will eventually find its way into dividend paying stocks.
The stock market is off to a good start so far this year. The S&P 500 is already up more than three percent in just the first two weeks. There are many on Wall Street who believe that as January goes, so goes the rest of the year. Although I do not put a lot of credence in historical statistics I do believe that many of the ingredients for a good year in the stock market are in place.
Have a safe, healthy and prosperous new year.
Best Regards,
James Onorato
President
January 18, 2012