Tags: downgrade | stocks | economy

U.S. Stocks Will Still Be the Place to Be

By Tom Hutchinson
Monday, 08 Aug 2011 10:05 AM Current | Bio | Archive

Recent data not only portends poorly for the economy in 2011, but it also changes the entire view of the post-crisis economy. A commonly expressed narrative over the past last two years is proving to be false.
 
It was said that the economy was coming back. The headwinds of high debt levels, high unemployment, and a still depressed housing market (among other things) didn't prevent a recovery but resulted in a softer recovery. This softer recovery was the "new normal" where GDP growth was simply lower than in past recoveries.
 
The Fed's money injections of QE and QE2 (as well as historically low interest rates and government stimulus programs) were supposed to jumpstart the private economy. But, when the stimulus ran out, the economy has tanked because there was no substantial private sector recovery — mostly the Fed just artificially boosting the economy with steroids. Now, not only does the economy stink again, but this time the Fed is out of bullets.
 
The recent debt deal not only focused attention on the fact that our debt is spiraling out of control, but it simultaneously highlighted the inability of our leadership to deal with it. So, we have a huge problem that isn't getting fixed. This added a new level of spook to the already dismal economic numbers sent the market reeling. In addition, S&P has just downgraded the US credit rating.
 
Yet, despite such massive headwinds, U.S .stocks are still a good bet for two major reasons.
 
Corporations are in good shape
While the rotten economy may have surprised some optimists, it hasn't surprised U.S. corporations. Many companies have cut expenses to the bone and gotten themselves in a position to thrive in a slow growth or no-growth economy. U.S. companies have shed workers, trimmed expenses to the bone, and refinanced debt at historically low rates. As a result, many companies have been highly profitable and have estimated trillions in cash on the sidelines, enabling them to post solid earnings even in a slow economy and weather a storm.
 
Money has no place else to go
A 10-year Treasury is currently paying a paltry 2.56%, a near all-time low, and a three-year CD pays just 1.31% on average. Meanwhile, Europe seems to be in a permanent state of "teetering on the brink of a financial crisis," and emerging markets have also performed poorly this year.
 
The best bet in town these days seems to be U.S. stocks. More specifically, high-yielding U.S. stocks can provide solid relative returns even in a flat market.  Many strong-yielding stocks operate in defensive industries that should continue to perform relatively well in a slower economy. As well, yields have risen and valuations have improved in the recent selloff, bolstering further the case for US stocks going forward.
 
For example, AT&T (NYSE:T) pays the highest yield of any Dow stock. In addition to being one of the two behemoth telecoms in this country, the company is one of the largest telecommunications companies in the world, operating in more than 220 countries.
 
The stock has sold down about 8% in just the past month alone and currently yields nearly 6%. The company has also raised the dividend every year since 1998.
Eli Lilly and Co. (NYSE: LLY) is a pharmaceutical giant with operations in 143 countries. The company currently sells at just eight times earnings, half the industry average and well below the S&P 500 aggregate of 14.6 times. At this valuation, Lilly yields a strong 5.4%.

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TomHutchinson
Recent data not only portends poorly for the economy in 2011, but it also changes the entire view of the post-crisis economy. A commonly expressed narrative over the past last two years is proving to be false. It was said that the economy was coming back. The headwinds of...
downgrade,stocks,economy
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2011-05-08
 

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