Permanent Value

Weekly Update: June 21- 25, 2010

Michael La Salle
June 25th, 2010

Disappointing Economic News Pushes Stocks Lower

Stocks closed the week lower this week as disappointing economic news dominated the headlines.  The S&P 500 lost 3.65% as the Dow Jones Industrial Average fell 2.94%on the week.

In economic news, existing home sales fell 2.2% month over on the in May, bringing the annualized level to a 5.66 million level, much lower than economists’ estimates of 6.2 million.  New home sales also disappointed as the annual rate fell to 300,000, coming in well below the estimated 400,000 level.  The disappointments continued on Friday as first quarter Gross Domestic Product turned out to be notably less robust than expected.  Real GDP quarter over quarter growth came in at 2.7%.  Consensus estimates were set at 3.0%.

In earnings news, Carnival Corporation surprised this week as the cruise and vacation company posted earnings of 32 cents per share, coming in 10.34% higher than the expected 29 cents per share.  Discover Financial Services also surprised this week as the company announced earnings of 33 cents per share, tripling analysts’ estimates of 11 cents per share.  Shares of the credit card issuer bounced over 3.50% on the news.

What opportunities are ahead?

Although this week showed some disappointing economic news, it is becoming more apparent that we are in a recovering economy with room to grow.  Over the past two and a half years we have seen an unusual amount of volatility in the markets that seems as if it is slowing down.

As we have seen recently, many stocks have huge returns in the first year or so after a major bear market.  After that initial bounce, many stocks begin to have a more “normal” trajectory and grow at a much slower pace.  One group of stocks tend to perform after the “big” bounce, are high quality, dividend paying stocks.

While the bull market is in the maturing stage, high quality stocks have a tendency to outperform the broad market.  High quality stocks can be considered stocks that consistently meeting of exceeding expectations of investors no matter the state of the economy, political environment, or other factors that may cause a market to fluctuate.

One of the most defining characteristics of a high quality company is a reliable dividend, and more importantly the ability to raise a dividend year after year.  Companies that consistently raise dividends are ones that have a predictable business with a diverse customer base, and strong financials.

Companies with these circumstances include Proctor & Gamble, Johnson & Johnson, Coca-Cola Company, and Colgate-Palmolive Company, who have all increased their dividends to shareholders for at least forty-seven consecutive years. 

Although these companies are not immune to downturns in the market, and may not have bounce that other companies have after a bear market, you may be able count on the reliability some of these higher-quality companies that consistently increase their payouts to shareholders.

Market Returns

  This Week Year to Date Last Year Last 5 Years
S&P 500 -3.65% -3.44% 17.01% -9.64%
Dow Jones Industrial Average -2.94% -2.73% 19.73% -1.50%


Next Week’s Economic Releases

June 28 – Personal Income and Outlays

June 29 – Consumer Confidence

July 1 – Motor Vehicle Sales, Pending Home Sales

July 2 – Employment Situation