Market Update

We are well into the first quarter earnings season, and the results are not quite as robust as they used to be.  Many prominent mega-cap multinational corporations, like Caterpillar, Dupont, ExxonMobil, Pfizer, etc. either missed earnings estimates or provided cautious guidance going forward.  There is nothing wrong with these businesses — the reason is our strong currency which reduced dollar-denominated sales overseas.  This affects all companies with significant business abroad.  Thus, we may witness a shift in market leadership toward domestic companies, which tend to be smaller.  It is about time — large cap stocks outperformed smaller companies last year.

Meanwhile, in addition to never-ending “Grexit” concerns, deflation is a new market bogeyman.  Indeed, deflation would be bad news for worldwide economies, and in order to prevent it, several European countries now sport negative interest rates (which causes weakness in Euro and other currencies and leads to dollar strength — see paragraph above).  With no inflation in sight, I don’t think Fed will raise interest rates anytime soon — doing so will only strengthen the dollar even more.

As a result of this very low interest rates environment, S&P 500 dividend yield is now higher than 10 year U.S. Treasury rate.  There is always a possibility that one or several multinational companies chooses to cut its dividend, and that may well trigger that long-awaited correction.  However, at this time, equities remain essentially the only game in town for investors expecting a reasonable return.