As the holiday season approaches, there are signs of improvement over last year’s depressed results. Forecasts are for a 20% pickup in retail sales and the Thanksgiving holiday will give more concrete direction. The stock market’s 72% gain over the last three years has improved many individual balance sheets and less discouraged consumer spirits will probably produce sales ahead of present expectations.
Sadly, the unemployment rate is still stuck near a 30-year high. Should retail sales be able to keep some of the forthcoming holiday momentum, this will help a bit. New housing construction, normally a big contributor to jobs, remains mired under the overhanging supply of existing homes. Housing prices would probably be even weaker were not such a huge potential inventory trapped in the uncertainties of loose financing and delayed foreclosures.
Inflation is at a near record low rate of 1.1 percent, down from an already low 2.7 percent only a year ago. One of the few conceptual “Wars” that has actually been won is the “War on Inflation,” which revives memories of the “Whip Inflation Now” buttons of the Ford and Carter Administrations. House prices and rents are an inflation component; their flat prices will also restrain the return of inflation.
Under these circumstances, the Federal Reserve has acted wisely, if a bit slowly, in embarking on another round of buying financial assets, thus expanding the supply of money. This has several effects of which the most important is to reduce the cost of borrowing money, encouraging both business investment and accompanying increased employment.
Japan followed an opposite policy after the collapse of its asset bubble in 1991. It raised interest rates and took other steps that probably seemed prudent then to short-term observers but led to the “lost decade” that kept it in recession for ten years. Following the global financial crisis in 2007, Japan kept step with other financial powers and is recovering.
The stock market greeted the Fed’s proposed actions with a nice rally. Stocks were overdue for the subsequent pause that is providing time and opportunity for investors to tune their portfolios. Increasing the supply of anything tends to decrease its cost, thus the dollar will decrease in exchange value. This adds advantages to American exporters that are badly needed as the country is running huge trade deficits with almost everyone.
Strong dividend stocks are premier investments under the forthcoming economic scenario. US stocks with growing export sales include DuPont (DD-$46), General Electric (GE-$16), IBM (IBM-$142), Intel (INTC-$21) and 3M (MMM-$84). The technology group is doing especially well and I am adding EMC (EMC-$21), the leader in information storage, even though it is not a dividend payer. All of these companies reported excellent September quarters and I expect this to continue into 2011. Cisco’s disappointing forecast lowered prices in this sector, adding an advantage to buyers.
Aflac (AFL-$55) is one of the few companies in the financial sector I recommend. Its earnings from supplemental accident and health insurance are growing nicely. Not coincidentally, the company has a substantial presence in Japan.
Gold continues to allure investors, excited by headlines of “record highs.” Well, yes, but one must allow for historical inflation and the record price for gold in today’s dollars was $2,387 thirty years ago. That was during a period of high inflation, unlike our present times. Even at more than $1,400 an ounce, that’s a 40 percent drop in thirty years.
“Gold bugs” can interpret that as meaning that gold prices still have room to run. Sensible investors can put 5-10% of their portfolios into Barrick Gold (ABX-$49) or Goldcorp (GG-$45), two quality mining companies that even pay dividends. More diversified mining companies include Brazil’s Vale (VALE-$31) and the U.K.’s Rio Tinto (RIO-$65). Their products will gain in price as a result of our Fed’s actions; so will their stock prices.
As we approach Thanksgiving, stock investors have reason to be grateful with investment returns this year of 10% or more from recommendations published here. I suggest they recognize this with gifts of food at collection points or money to your neighborhood shelter. There are few better returns to both givers and recipients.