The first trading day of the new week started off a little week as investors paused to catch their breath after last week’s Payroll Report and ADP Numbers. When I looked at the headlines this morning I saw several articles about how to deal with the extended stock market and what a critical appoint we are at in the markets right now. While headlines like that are great for selling ads a look at what’s really going on in the stock market suggest that we have plenty of room for this market to run in the second half of 2014.
The economy is getting better. I know there are lots of opinions about the subject floating around but I am a numbers guy and the numbers say the economy is growing and the growth is starting to accelerate. We just had a fantastic jobs report and the report from April was revised upwards. Monday morning the Conference Board Employment Trends Index was released and it rose in June indicating continued improvements in the labor market for the second half of the year.
Earnings projections for the rest of the year are pretty good as well. According to a recent Reuters survey analyst expect earnings for the second quarter to grow by more than 6% in the second quarter. They also expect the pace to pick up as the year goes on with the third and fourth quarter to produce double-digit earnings growth for the first time since 2011. On top of that, buybacks and merger activity are creating additional demand for stocks that should help propel prices higher for the rest of the year.
While the market is going higher don’t take this as permission to buy stocks with great abandon. As the market advance ages the major players are getting a lot more selective about which stocks they are willing to buy. They are avoiding the garbage stocks and focusing on those with the very best fundamentals. The worst possible outcome for an investor would be town the wrong stocks as the broad market moves higher and end up losing money in a rising market. There are some stocks you simply must avoid as they just do not have the type of fundamentals that can power prices higher.
Wal-Mart (WMT) is a great example of a stock you need to avoid right now. While Wal-Mart is a great company, growth has stagnated and there is just nothing going on to move the stock price higher. Analysts are looking for lower earnings in the second quarter with anemic sales growth. They have been lowered estimates steadily for the past few months and the company has fallen short of the very low expectation in two of the last four quarters. This stock has missed the rally the last year and is going to sit out the next leg higher as well.
This time last year Cincinnati Financial (CINF) was a buy and the stock moved higher in the second half of 2013. Since then the fundamentals have deteriorated and by January the stock was a sell. They fell short of analyst expectations in the first quarter and analysts have been lowering their estimates steadily. The stock is down almost 6% so far in 2014 and it looks like more declines are on the way. Just last week my Portfolio Grader tool downgraded the stock to a strong sell. Investors looking to capture the market upside I see for the rest of this year need to avoid this stock.
International Business Machines (IBM) is one of the best known companies in the world but that doesn’t mean you should rush out to buy shares of Big Blue. The company is having a hard time engineering revenue growth and they have been struggling to match Wall Street’s estimates for the last year. The stock has been rated a sell all year long and the stock has badly lagged the markets advance. IBM shares are still a sell so keep them out of your portfolio until the fundamentals improve.
All signs point towards a solid second half of 2014 for the stock market. Interest rates are low, the economy is improving and earnings are accelerating. Make sure you shed the stocks that are not the best of the best types that lead the market higher and focus on owning the quality growth stocks that will show the way higher.