Reuters: Money: How to play it: Preparing for a stock market stall

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How to play it: Preparing for a stock market stall Mar 16th 2012, 16:30 By David K. Randall NEW YORK | Fri Mar 16, 2012 12:30pm EDT NEW YORK (Reuters) - Investing has been a little too easy lately. If you put your money almost anywhere in the stock market on the first trading day of 2012, you've seen a double-digit return. The Standard and Poor's 500 index of large-cap stocks, the Russell 2000 index of small-cap stocks, and the Stoxx 50 index of European blue chips are each up about 11 percent since then. The Vix, a measure of stock-market volatility, is at a five-year low. Yet even as the S&P 500 index broke 1,400 for the first time in four years Thursday, analysts say the U.S. stock market may soon find itself running in place. That's because, despite widespread job gains and a jump in consumer confidence that suggests fears of a double-dip recession are finally moot, the U.S. economy still isn't fully healed. High gas prices, tensions with Iran and the stagnant European economy could add additional salt to the wound. Sluggish earnings growth may be another hurdle for the stock market. Companies had "less than impressive" earnings during the last quarter of 2011, said Barry Knapp, chief equity strategist at Barclays' Capital. Margins may continue to narrow in the first quarters of 2012 in sectors like consumer discretionary, technology and industrials, he said. Nicolas Colas, chief market strategist at ConvergEx group, told clients that "analysts are unambiguously cautious, if not outright frightened, by what they expect to see from first-quarter earnings releases." It could all add up to a stock market pause. "I think we're stuck for the time being," said John Manley, chief equity strategist at Wells Fargo Funds. He believes that the rally will fade and the S&P 500 will mostly trade between about 1350 and 1375 for the rest of 2012. The index closed at 1402 Thursday. Here are ways to play a post-rally stock market stall: GET PAID TO WAIT Analysts say that signs of continued economic improvement may not be enough to push the stock market significantly higher over the next few months. "We've had a run up that is too much, too soon," considering earnings growth looks to be slowing, said Manley. While he believes that the S&P 500 could end the year higher than 1400, he thinks the index won't jump much until after the November elections in the United States. He recommends that investors look at dividend-paying stocks in the meantime. "This should be a very good time to keep the reasonably high-yielding stocks in place and take your return through the dividends," he said. Vanguard's High Dividend Yield ETF offers exposure to quality companies that offer large dividend yields. The $3 billion fund, which costs 13 cents per $100 invested, yields 2.8 percent, or about 1 percentage point more than the broad S&P 500 index. Exxon Mobil is the fund's top holding at nearly 7 percent of assets, followed by Microsoft, Chevron and General Electric. The iShares High Dividend Equity ETF is another option, though it is more expensive at 40 cents per $100 invested. The fund yields 4.3 percent, and is top weighted, with AT&T accounting for nearly 11 percent of assets. Barclay's recommends health-care and energy sector stocks as two ways to play a stalled market. The health-care sector of the S&P 500, for instance, is expected to pay a dividend yield of 2.4 percent over the next year, slightly more than the 2.2 percent yield of the broad index. Others pointed to the behavior of pensions and other large investors as a reason the stock market could muddle along through the rest of the year. JJ Kinahan, chief derivatives strategist at TD Ameritrade, said that until institutional investors start to shift their asset allocations toward equities, the market won't move much higher. "This has been a rally of non-believers. But once you start to see funds unwind their fixed-income positions and go into stocks the market will push significantly higher," he said. Large retailers could be one way to hit the middle ground between optimism and caution, said Richard Weeks, managing director of VWG Wealth Management in Vienna, Virginia. Department stores like Macy's are one option. The company trades in line with the broad stock market at 13.6 times earnings and pays a dividend of 2 percent. PREP FOR A LATE-YEAR RALLY The market's stall could also be a buying opportunity for a post-election rally, said Phil Orlando, chief market strategist at Federated Investors. After the U.S. elections, he expects a rally of another 10 percent through the end of the year. For investors with a longer time frame, Orlando suggests buying riskier and cyclical assets during market slumps. In the bond market, he likes junk over Treasurys, which are yielding about 2.2 percent. The SPDR Barclays High Yield Bond ETF, for instance, yields 7.3 percent and is up about 5 percent so far this year. To be sure, the rally in junk bonds could flounder alongside the stock market if investors lose their tolerance for risk. For stocks, Orlando prefers "small caps over large caps because they have more attractive valuations relative to their growth prospects," he said. The tiny $19.7 million Huber Capital Small Cap Value fund is one option for investors who prefer active management. The fund, the 2012 Lipper Award winner for small value funds, is up nearly 16 percent so far this year. Its portfolio is overweight in consumer cyclical, materials and real estate companies. (Reporting By David Randall: Editing by Jennifer Merritt; Desking by Mark Porter) Link this Share this Digg this Email Reprints

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