At the start of 2012, investors were assessing whether it was
wiser to focus on the deep value that many stocks offered, or the
incipient signs of a global economic slowdown that would cap any
upside for stocks. They focused on the former in the first quarter,
giving stocks a solid boost. But it was the economic headwinds that
dominated investor sentiment during the second quarter.
For the rest of the year, you can expect more of the
same.
The
market
is likely to focus on still-cheap valuations whenever the global
news flow quiets down. And investors will likely shun stocks when
the economic seas get rough.
Still, it's been an uneventful six months -- at least in terms
of unexpected events. Europe remains a mess (what's new), U.S.
corporate profits remain quite robust (no surprise there) and the
economy
is still in growth mode (though hardly robust).
Perhaps the next six months will bring a change and the market
will respond to new catalysts.
Here are five events that could shape the market's direction
well into 2013...
1. Iran blinks and oil hits new lows
The Iranian government is in saber-rattling mode again,
test-firing a missile to snub any perception of weakness when it
comes to negotiating nuclear restrictions. I think it's a bluff, so
the recent move back up toward $90 crude oil is a
head-fake.
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Recent reports about Iran imply that economic sanctions have
really taken a toll.
Inflation
is surging and domestic economic activity is shrinking.
Another round of sanctions, this time focused on a global
boycott of Iranian oil that took root on July 1, promises to deepen
the economic distress. That's why Iranian leaders will have to
shift course -- sooner rather than later -- and agree to severe
restrictions on their nuclear development program.
If and when that happens, then look for oil prices to resume
their downward slide. Demand for oil remains weak, and here in the
United States rising production is starting to take a meaningful
bite out of oil imports. This could set the stage for a drop in
West Texas Intermediate Crude to $70 or even $60.
2. The sharp airline rally
Along with makers of pick-up trucks, transportation firms and
operators of cruise ships, no industry would be more pleased to
seeing falling crude oil prices like airline carriers. Jet fuel is
their single-biggest expense, and by some estimates, a $10 drop in
crude oil pumps up industry profits by more than $1 billion. The
Dow Jones U.S. AirlinesIndex , which has fallen from 120 in 2007 to
a recent 70, looks poised to be one of the top performing indexes
of the next six months.
It's not only about falling fuel prices. Companies that operate
leisure parks such as
Disney (NYSE:
DIS
)
,
Six Flags (NYSE:
SIX
)
and
Cedar Fun (NYSE:
FUN
)
have traded up to 52-week highs in recent sessions as vacation
spending spikes higher.
The Obama administration recently streamlined travel regulations
and visa requirements for foreign visitors, which has set the stage
for a banner year for tourism. Analysts at McKinsey & Co. note
that if foreign travel to the United States rebounded to pre-9/11
levels, when it became much harder to get a visa, then the U.S.
economy would receive a $214 billion annual boost. Airlines will
play a key role in bringing those tourists over.
3. The U.S. economy slumps in the summer but surges
in the fall
The U.S. economy is clearly slowing as the weight of depressed
trading partners starts to drag us down. U.S. manufacturing
activity dropped in June to its slowest pace in three years. Other
economic surveys
such as the CFNAI
are also flashing concern. As a result, second-half outlooks from
many major companies could be downbeat enough to bring stocks to
their lowest levels of the year.
Yet there are seeds of hope. Recent events in Europe will likely
help to avert any major crisis in the near-term, and the Chinese
government is now stepping up its own stimulus efforts. As a
result, many key players in the European and Asian economies that
had been holding back on orders for fear that economic events will
spiral lower will likely shift gears. The pent-up demand could
yield
to a snapback by the fourth quarter, which will likely boost the
U.S. economy later in 2012 and into 2013.
4. The natural gas rally no one sees coming
Although the U.S. Northeast was pummeled by Hurricane Irene last
summer, the rest of the country has dodged a bullet in recent
years. It's been several years since a major hurricane damaged the
drilling rigs in the Gulf of Mexico. But water temperatures in the
Atlantic basin remain elevated, which helps explain why we had four
named storms in June -- the highest number on record.
If the trend persists, then there's a decent chance that one of
this summer's big storms is perfectly situated to wreak havoc on
the Gulf of Mexico's energy complex. The last time that happened,
in 2007, natural gas prices surged.
This time around, it's imprudent to expect a huge jump in
natural gas prices because onshore production is much more robust
these days. Still, natural gas is already on the rise -- jumping
from under $1.95 per thousand cubic feet (
MCF
) in late April to a recent $2.80. An active hurricane season could
easily push that figure toward $3.50 or even $4. This would bring a
huge sigh of a relief for gas drillers that were buckling down for
a long-term phase of $2 natural gas.
5. Massive bankingconsolidation
One of the unintended consequences of the pending Dodd-Frank
banking legislation is that it will make it very difficult for
local banking franchises (those with less than 100 branches) to
earn sufficient profits while complying with the costly
regulations. As a result, look for leading regional banks
such as
U.S. Bancorp (NYSE:
USB
)
,
Huntington Bankshares (Nasdaq:
HBAN
)
,
Regions Financial (NYSE:
RF
)
and others to go on a buying spree. Analysts will see these deals
as immediately accretive and rising profits should set the stage
for a solid rally in these regional banks late this year and into
2013.
Just as is the case with mega-banks, these regional banks are
currently quite inexpensive, typically trading for around 10 times
earnings
and right around
book value
. An improvement in the housing sector, a growing sense that the
U.S. economy will remain in growth mode in 2013 and the
aforementioned
merger
and
acquisition
benefits should all provide tailwinds to this sector.
Risks to Consider:
There's certainly the possibility that a different exogenous
event will have the greatest effect on the market in the second
half of the year.
Action to Take -->
On balance, we look poised for more "upside" surprises than
negative shocks. But we have to get past a tough summer with
tepid-sounding economic reports and cautious management commentary
when companies are discussing near-term prospects.
-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC does not
hold positions in any securities mentioned in this article.