As the year began, investors were encouraged to stick with 2011’s winners — chiefly defensive, dividend-paying U.S. stocks that offered safety and income.
What goes around has come around again. Many of the economic and political concerns that plagued global markets in 2011 are even more acute.
In the United States, investors are increasingly worried about weaker-than-expected second-quarter earnings and when, and if, the Federal Reserve will move to provide the lackluster economy with additional stimulus.
Markets are also tracking the political landscape leading up to November’s presidential election. Expect another wrenching battle over the U.S. debt ceiling and fighting on the edge of the so-called fiscal cliff over the scheduled expiration of the Bush administration tax cuts and other spending cuts and additional taxes.
Europe, meanwhile, continues to be a modern-day Tower of Babel, to which investors now can add the sputtering economic engines of China and India.
These and other headline-grabbing issues were on the radar in January when we highlighted 10 investment themes for 2012. At this midyear checkup, what course corrections, if any, should investors make? Check out these money-making investment ideas for the second half.
Go big • Six months ago it was clear that the 2012 market climate would favor careful stock selection and prudent stewardship of capital. Advice to stick with large U.S. stocks and to hunt for yield has proved lucrative.
As for what to do next, global economic growth is an oxymoron at this point. Consider beefing up holdings of large-cap U.S. stocks with solid growth prospects, strong cash flow and a history of dividend payments.
Growth stocks should continue to top value stocks, while large-caps stay ahead of small-caps and U.S. equities outperform Europe. U.S. midcap stocks increasingly are seen as overbought and overvalued.
The biggest of the big, the so-called mega-caps of the Standard & Poor’s 100-stock index, in fact are breaking out of a two-year trading range and emerging as market leaders, according to Bank of America Merrill Lynch research.
For example, the 10 highest-yielding stocks in the Dow Jones industrial average, the so-called Dogs of the Dow, were up 6.8 percent for the year through July 11, while the Dow rose 3.2 percent. AT&T Inc. and Verizon Communications Inc. are the top-two yielders in the Dow, and also the biggest percentage gainers.
Be defensive • An emphasis on the return of capital rather than return on capital has not only given investors a solid cushion, but has also made them money. Defensive stocks have been the U.S. market’s best performers so far this year.
As for what to do next, the best offense continues to be a good defense, even with strong year-to-date gains in traditionally stable, dividend-rich market sectors within the Standard & Poor’s 500 Index.
Consumer discretionary stocks rose 11 percent on average for the year through July 10, while the health-care sector gained 8.5 percent and consumer staples added almost 8 percent. Those sectors are still attractive, according to Merrill Lynch. But the outlook is more cautious for the utilities sector, which is up 2.1 percent on the back of a 15 percent gain in 2011.
Beware sensitivity • Stocks sensitive to the economy are lagging this year, just as they did in 2011. The energy sector has fared worst, down almost 6 percent, while materials and industrials stocks are both up about 3 percent on average.
The one cyclical standout is technology, gaining almost 11 percent on the year so far.
As for what to do next, on a valuation basis, materials, industrials and energy are cheap relative to the S&P 500, but that doesn’t make them screaming buys — yet.
"These sectors will outperform over time," said Heather Brilliant, vice president of global equity and credit research at investment researcher Morningstar Inc., in a recent report. But, she added, "the issues holding these sectors back — namely lower commodity prices and weak global demand for commodities — are likely to continue for the coming quarter."
Technology is different. Remarkably, technology stocks are priced lower than utilities. Technology also trades at a discount to the S&P 500 for the first time since 1996, according to Merrill Lynch. Tech stocks tend to have lots of cash, strong balance sheets and generally good growth prospects, especially among software and services businesses. One caveat is that tech’s exposure to Europe is the highest of any S&P 500 sector.
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