Here's the investing roadmap for the rest of 2014

Even though we have a clearer sense of the economy's trajectory now, these are not normal times.

By StreetAuthority Jul 9, 2014 2:36PM

Portfolio account statement © Alamy Creativity, AlamyBy David Sterman, StreetAuthority

When the Federal Reserve first suggested a gradual tightening of its monetary policy in May 2013, investors began to wonder if the long-running bull market would come to an abrupt end.

A quick spike in interest rates at the time gave a sense that times were indeed changing.

Yet investors end up shrugging off that noise: The Standard & Poor's 500 Index ($INX) rose an impressive 22 percent between July 1 of last year and June 30 of this year. Toss in dividends and investors garnered a 25 percent total return -- roughly the amount investors should expect to garner over a three-year period in normal times.

But these are not normal times.

The stunning 191 percent gain for the S&P 500 since bottoming out in March 2009 is remarkable in light of the fact that the subsequent economic rebound after the Great Recession has been quite tepid. Low interest rates, a huge amount of global liquidity and very high corporate profit margins all get credit for the bull market that has exceeded the wildest expectations of even the most aggressive market strategists.

At this point, it might seem the wisest path to sit back and enjoy the ride, waiting for another 20 percent gain over the next 12 months.

Yet before you grow too complacent, you need to take a closer look at factors driving the market higher and assess what kind of backdrop we should expect in the six months ahead.

Here are key events and factors you should be tracking:

The economy

At this point, there are really only two points of economic interest: unemployment and inflation.

The former is falling and the latter may be rising (as I noted a few weeks ago). We now know that the U.S. economy created at least 200,000 jobs for the fifth straight month. That's the first time that has happened in more than a decade. The next payroll report comes on Aug. 8, and if that report also highlights a gain of at least 200,000 jobs, then it's hard to see how the Fed will stick by its "no rate hikes in the near future" policy.

Inflation is the other item you should be tracking, especially the core Consumer Price Index. The next reading will come July 22. Inflation levels are still fairly low in the context of long-term price pressures. But the core consumer inflation rate has ticked up recently, and even if it's creeping up slowly, the trend is disconcerting for the Fed, which must maintain its mandate for price stability.

Margins vs. investment

Companies have been delivering knockout profit margins over the past few years -- not because they have great pricing power, but because they have maintained a very tight lid on staffing levels, compensation and, equally important, capital spending. The solid margins have fueled a frenzy for dividend boosts and share buybacks at an unprecedented pace, which has in turn helped fuel the bull market.

But if the economy strengthens in the second half of the year, then capital spending is also likely to firm up, right at time when employers also need to consider raises for employees that may be tempted to start looking for another job. That backdrop may portend a pullback in margins, which in turn, will make year-over-year profit comparisons more difficult in coming quarters.

But that scenario is not necessarily a negative for stocks. Investors may be willing to tolerate a lull in profit growth if they believe that stepped-up investments by companies now (in their labor force and capital equipment) create better positioning for a faster-growing economy in 2015 and 2016. There is a precedent: A large wave of investments in headcount and corporate infrastructure led to a 7 percent drop in aggregated S&P 500 profits in 1998. Yet that index rose 27 percent that year.

To be sure, recent earnings seasons have turned out to be snoozers, and many expect the coming wave of second-quarter results to be undramatic. Still, you need to keep a close eye on quarterly results and outlooks (even if the beach beckons). The most important reports -- in terms of signals for the U.S. economy -- will come in the first two weeks of earnings season. By July 18, when General Electric (GE) weighs in, we'll already have a clear read on the issues of margins, capital spending -- and the market's reaction to them.

Back to school

Later this summer, parents will be trotting to the malls to buy all the clothes and supplies needed for the coming school year.

It could be a very robust period, mostly because the past few back-to-school seasons have been so dismal. This continues to be a great time to start researching any retailers that have had a tough go in recent years. A firming economy in the second half of 2014 could bring a flood of institutional money (such as mutual funds and hedge funds) pouring into value-laden retail stocks.

Gridlock deepens

We didn't think it would be possible for the gridlock in Congress to deepen, but it has.

We're at the point where funds to pave highways are now so scarce that projects are getting canceled, simply because Congress can't decide on a highway bill. It's unclear if the foot-dragging in Washington will lead to a wave of "throw the bums out" sentiment in November, or if the next Congress will be even more partisan and even more deeply deadlocked. The prospect of a frozen government for the final two years of the Obama administration has led to rising concerns from the U.S. Chamber of Commerce that out nation's competitiveness will start to erode.

How would the markets react to deeper gridlock? The S&P 500 fell more than 100 points in the period between the four weeks prior to the 2012 elections and one week after.

Risks to consider: A firming economy might be so large a tailwind that it overpowers all the potential headwinds of lower profits and rising interest rates.

Action to take: Investing has become very easy. You buy a stock or a fund, and it rises in

value. But for anyone who has been through a number of market cycles, it's clear that this uninterrupted winning streak is pretty unusual. As the market move ever higher, price-to-earnings (P/E) ratios start to move to hard-to-tolerate levels. The inverse of that ratio (known as the earnings yield) has moved ever lower as a result, though it remains higher than the yield offered by fixed income investments such as bonds and CDs.

The key question for the next six months: Will investors start to conclude that the shrinking gap between the corporate earnings yield and soon-to-rise interest rates is no longer worth the risk? We'll have an answer to that question in coming months.

Tags: GM
Jul 9, 2014 4:47PM
This article is so stupid!

"Here's the investing roadmap for the rest of the year:"

"See the blank space above?  Use it to draw your own friggin map."
Jul 9, 2014 9:23PM
"At this point, there are really only two points of economic interest: unemployment and inflation.
The former is falling and the latter may be rising (as I noted a few weeks ago). "

The economic ignorance of this "premise"  is - staggering.

The actual (real, unadulterated) unemployment rate is not falling, and has in fact been rising for at least 4 years. . And actual inflation is unquestionably rising - and will go higher.  Believe government's statistics at your peril.

True economic growth and productivity are the only remedies to a stagnating and inflationary economy - which is especially true when "money" is purely fiat, and created at the whim of "Central Bankers".

Governments, and their corporate cronyists (abettors) will always obfuscate and obscure this most basic economic law, because it is in THEIR greedy interest.

True "free markets" only exist when voluntary participants (engaged in their own self interest) agree to participate. That is not the world we live in. We live in the "Greed of Government" world.
Our ransoms to satisfy this greed are "compulsory" -  pay them the ransom, or go to prison (because they have the military force to put us there, or kill us). We are "cannon fodder" to them. This "ransom" - ironically and inexplicably - prolongs our delusional sense of liberty ("the price of civilization is taxes" and all that bull squat)- when in fact we are debt serfs to this bastardized economic system that they have created.

" When the people fear their government, there is tyranny; when the government fears the people, there is liberty."

Thomas Jefferson

When is the last time that you honestly felt that your Government (rightfully and as it should be) feared you?  Yeah - me too - which is to say...never

Jul 12, 2014 10:27AM
Hi all.....I've never commented here but just out of interest I thought, what the heck perhaps I'll jump into the mix. 

I've been an investor on wall street for the better part of 35 years.  In those years I've witnessed many highs and many lows but kept investing on a ongoing and regular bases through it all.  I've now been through many presidents and in this last election and for the first time in my life our current president is younger than me.  However, I've always believe that no matter what articles are written, who is in political power, what naysayers are out there it is always best to simply be invested and ride the waves of it all.  There is an old saying that goes....the rich simply get richer and the poor keep getting poorer.  I was dirt poor once lived pay check to pay check but always invested part of that check for my future.  I'm now one of those guys that gets richer because of my belief that a person should pay themselves first before they budget anything else in their life and time will take care of the rest.  I'm living proof.  Ignore the optimist and the pessimists and pay yourself first every month and you to will benefit from the results.

Jul 10, 2014 7:37AM
I say and have said, "It's not worth the risks". I'm down to 35% stock. Most are high profile well run dividend payers.
Jul 9, 2014 3:08PM

"The stunning 191 percent gain for the S&P 500 since bottoming out in March 2009 is remarkable in light of the fact that the subsequent economic rebound after The Great Recession has been quite tepid"

How is this so stunning? We have nearly Doubled our National Debt since then while the Federal Reserve has more then Quadrupled it's Balance sheet. The Global FEDS have bloated their Balance sheet by over $10Trillion. This continued ignorance by the Media Types of what, why, and how things have happen is more then a little bit beyond Insanity. That's not even taking into consideration the massive Student Debt Bubble which is over $1.2Trillion and counting.

Jul 9, 2014 7:01PM
Here is my personal roadmap--buy quality and diversify !!!

And remember--don't fight the Fed !!!

Jul 12, 2014 9:16AM
You don't need a good map for investing unless you have a lot of spare time you can devote to it....what you need is a good honest interested mentor/advisor for attaining your goals.
Jul 12, 2014 8:00PM
Jul 12, 2014 11:25AM
The unemployment 'number' as expressed in percent, is falling but the actual number of people out of work is rising as shown by the worker participation rate which is the lowest it's been in 30 years!  When the worker participation rate increases, we will have a growing economy.  Until then...
Jul 10, 2014 8:02AM
You don't need a roadmap, just look for the nearest exit and accelerate off it. Getting as far as you can from organized finance and investment is your wisest move. 
Jul 9, 2014 2:42PM

yeah it's normal. 


but it's now called the New Normal

Jul 10, 2014 12:42PM

I have a roadmap to Utopia....But it's written in some funny language, and the highways and by-ways have strange looking numbers on them...

The map has one thing I understand on it...says..."At the end of the Rainbow".

Jul 10, 2014 11:01AM
Beware folks!!!...Sucker's rallies, we will have then through out the day....Scumbags in complete control, do not fall for their bs....Remain very cautious today; cheaters in charge and loving it...More later.
Jul 10, 2014 9:16AM
We warned you all yesterday after the close, no doubt these manipulators would come out this morning doing their thing from the get go, basically all we had yesterday was a big sucker's rally and today they will manipulate these markets down and big....Best place this morning is the sidelines folks, crooks in total and absolute control even before the bell....Today is their day once again, crooks still make lots of dough on Wall Street.
Jul 10, 2014 12:58PM
Again folks, you are seeing sucker's rallies, scumbags love them to try to lure folks in and then destroy them; well, at 1250 hrs they started doing just that so down we go again....On and off the floor we are dominated by cheating manipulating crooks today so just remain on the sidelines...Be very  this afternoon....More after the close.
Jul 9, 2014 7:07PM

So the gridlock in congress could cause the USA to lose it's competitive edge. This comes as no surprise since

W and the republican congress almost destroyed the country they could not allow any Democrat to help the

country in any way. From day 1 they have done everything they could to destroy this President the republican

party cares only about political gain regardless of the harm it does to the nation and the people


Jul 9, 2014 2:59PM
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Apple will be the first customer to test Chinese manufacturer Hon Hai's new robotic workforce.
By The Fiscal Times 1 hour ago

Some analysts see this trend toward robotics transforming labor markets globally. Marshall Brain, founder of How Stuff Works and author of Robotic Nation, says the push towards automation is happening much faster than people realize. "Within a couple of decades," said Brain in an interview, "there won't be a single job that robots can't do better than humans."
Highway crisis looms as soon as August, US warns - News
Jul 1, 2014 - That's because the balance in the federal Highway Trust Fund is dropping and will soon go below $4 billion, the cushion federal officials say is ...
By KEN RITTER, Associated Press
Water levels at US Lake Mead drop to new low
Drought in the southwestern U.S. will deplete the vast Lake Mead this week to levels not seen since the Great Depression in the 1930s, federal water managers said Tuesday.
Jul 9, 2014 2:51PM
A good sensible summation of the current market and potential trends.
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