A year-end stock comeback? It's happened before

[scandal 951]

In the words of JP Morgan, "What will the market do? It will fluctuate."

I do think dividend yields are compelling at the moment. I've shifted heavily into SDYsince the end of the debt ceiling debate in Aug.

A year-end stock comeback? It's happened before

By DAVID K. RANDALL, AP Business Writer – 4 hours ago

NEW YORK (AP) — 2011 was shaping up to be a washout for the stock market just two weeks ago. Now, it's within shouting distance of its biggest comeback in nearly three decades.

The Standard and Poor's 500 index has jumped 11.4 percent since hitting its lowest level of the year on Oct. 3, largely because investors have become more confident that Europe will shelter its banks from huge losses on Greek bonds should that country's government stop making payments on its debt. For much of the summer, investors feared that a Greek default could lead to a freeze of lending between European banks and cascade into a credit crisis similar to the one in 2008.

The S&P 500 was down 12.6 percent for the year as of Oct. 3, when it closed at 1,099. As of Friday, it had trimmed the loss to 2.6 percent. It needs to gain just 33 points, or 2.8 percent, to get above 1,257, where it started the year.

If the S&P 500 finishes the year with a gain, it will be the biggest turnaround since 1984. That year, Apple Inc. introduced the Macintosh, and President Ronald Reagan's campaign ads proclaimed that it was "Morning Again in America." It was also the last time that the S&P 500 fell more than 10 percent during a calendar year and finished the year in the black. The index finished that year up 1.4 percent.

Edging out another gain of that size in 2011 wouldn't make anyone rich. But consider the hand that investors were dealt this year: A tsunami and nuclear disaster in Japan plunged the world's third-largest economy into a recession and created a worldwide parts shortage. Uprisings throughout the Arab world sent the price of gas skyrocketing to an average of $3.98 a gallon in May. The U.S. lost its top-notch credit ranking for the first time. And Europe has teetered on the edge of a financial crisis that could hobble the region's banking system.

With all of that going on, investors might wonder how the S&P 500 index could possibly end the year higher than where it started. The biggest reason: some think stocks may be the best value out there.

With dividend payments alone, the S&P index offers a return on par with low-risk U.S. Treasurys. From Aug. 24 through Thursday, the yield on the 10-year Treasury note was below the dividend yield of the S&P 500 index. Since 1962, the only other time that's happened was during the 2008 credit crisis, according to J.P. Morgan.

"You have to have pretty dark thoughts to think that there's not a chance that the S&P 500 beats out Treasurys at this point," said Bill Stone, chief investment strategist at PNC Bank.

Stone also thinks company earnings are going to be better in the third quarter than many analysts expect, driving stock prices higher. Since July, analysts have cut back their estimates for the S&P 500's third quarter earnings 3 percent because of concerns that the U.S. economy might be heading into a recession. Since then, retail sales, applications for unemployment benefits, and the number of jobs added in August have been better than Wall Street expected. "The market has been priced for the worst, but that's not bearing out in reality," Stone said.

Others point to the fact that the S&P 500 was stuck in a narrow trading range since Aug. 4th. That day, the index fell below 1,260 during a broad sell-off. The stock market has moved up and down a lot since then, but hasn't really gone that far. The S&P 500 has mainly traded between 1,099 and 1,218, a relatively small band. On Friday it broke out of that range, closing at 1,224.

Investors who buy and sell the S&P 500 index based on analyzing patterns in charts — known on Wall Street as technical traders — believe that indexes will tend to keep moving steadily in the same direction once they break out of a trading range. That's because investors tend to follow the herd. Increased confidence in Europe's ability to prevent a widespread financial crisis may help the S&P 500 move out of that range and stay there.

"If we have truly averted the worst of Europe then a large dark cloud is going to be lifted off of this market and momentum is going to take over," said Richard Ross, global technical analyst at Auerbach Grayson.

Seasonal investor behavior might also lift the S&P 500. The S&P index typically gains an average of 3.9 percent during the last three months of the year. "Positive market psychology hits a fever pitch as the holiday season approaches and does not begin to wane until the spring," according to the Stock Trader's Almanac. Professional investors also tend to readjust their portfolios at this time of year, buying stocks that have done well and selling those which have fared poorly for tax purposes.

That could have a greater than usual effect this year because the S&P 500 remains cheap, analysts say. At the start of the year, the S&P 500 traded at 15 times its earnings over the last 12 months. That was below the average price-to-earnings multiple of 18.6 over the last 10 years. Friday, the S&P 500 traded at 12.9 times earnings.

It's not quite time to count on gains, however. The S&P 500 has fallen more than 10 percent 43 times since 1900, according to Sam Stovall, chief equity analyst at Standard & Poor's. It finished the year with a gain only 11 times, a comeback rate of 26 percent. The average gain in those years was 1.8 percent.

"I'm skeptical of this rally," Stovall said, noting that Europe's debt problems still aren't solved. "But even if there is a gain, history says that you're not going to end up with anything to be too excited about."

[mawilson 2,133]

I do think dividend yields are compelling at the moment. I've shifted heavily into SDYsince the end of the debt ceiling debate in Aug.

Doesn't pay a lot, by the looks of it. 3-4% yield? Might as well put your money in state/local munis. BNY in New York currently yields 6.57 and is 100% tax exempt - federal, state and local.

[웃 910]

http://www.google.com/finance?q=NYSE:DPO

9.3% Annual Dividend - Paid monthly at 23 cents per share.....Currently priced at $9.87 (but you can subtract 23 cents from your average cost per month, no?)

[scandal 951]

Disclaimer to this post. As should be OBVIOUS, this post reflects my personal opinions ONLY. It is not to be construed as investment advice. Any investment actions taken by anyone based on the content of this post (or any other post I may write on this website) are at the sole responsibility of the investor and I take no responsibility whatsoever.

Thanks guys. I appreciate the suggestions. I'll do a bit more research but I think I'm ok with my current mix.

Doesn't pay a lot, by the looks of it. 3-4% yield? Might as well put your money in state/local munis. BNY in New York currently yields 6.57 and is 100% tax exempt - federal, state and local.

Yeah, SDY yield is about 3.5%. This is in my IRA, so the tax efficiency is not relevant. And this is in the equity portion of my IRA. I'm targeting roughly 10%/25%/65% cash(CD)/bonds/equities. A holding in BNY, while an ETF, would be part of my fixed income 25% percentage. My bond portfolio is skewed heavily toward high-yield, with yields in the 6-8% range.

BNY does look interesting, so I'll keep it on my radar.

Price Performance

Price on 10/13/11 $15.05

52-Week High/Low $15.94 / 12.97

10-Day Avg. Volume 17,222

12 Month Price Performance -1.6%

Market Capitalization $193.1 Million

Beta 0.23

Business Description

Operates as a nondiversified, closed-end fund.

Seeks to provide current income exempt from

Federal income tax and New York State and

New York City personal income taxes. Plans to

invest primarily in municipal bonds that pay

interest exempt from Federal and New York

State and City income taxes.

http://www.google.com/finance?q=NYSE:DPO

9.3% Annual Dividend - Paid monthly at 23 cents per share.....Currently priced at $9.87 (but you can subtract 23 cents from your average cost per month, no?)

No thanks. Too narrow and undiversified for my taste, it's just the Dow30. Plus, it's juicing the returns with a double-down bet by selling covered calls. This is not for me at all.

Dow 30 Enhanced Premium & Income Fund Inc. (the Fund) is a diversified, closed-end management investment company. The Fund’s investment objective is to provide a high level of current income, with a secondary objective of capital appreciation. The Fund seeks to achieve this through a two-part strategy. First, the Fund will invest all of its net assets in the 30 stocks included in the DJIA in approximately the amounts such stocks are weighted in the DJIA and/or in other securities or financial instruments that are intended to correlate with the DJIA. Second, the Fund will write (sell) covered call options on some or all of the stocks or other instruments in its portfolio.

My goal with SDY is to have an efficient (low MER) exposure to the best stable dividend producing US equities. In high volatility markets like we're going through lately the dividend stream gets washed out by the price movements but over the long term the data I've seen indicates that consistently growing dividends correlate very highly to overall performance.

OBJECTIVE

The SPDR® S&P® Dividend ETF before expenses seeks to closely match the returns and characteristics of the S&P High Yield Dividend AristocratsTM Index. Our approach is designed to provide portfolios with low portfolio turnover, accurate tracking, and lower costs.

Ordinary brokerage commissions may apply.

ABOUT THIS BENCHMARK

The S&P High Yield Dividend AristocratsTM Index is comprised of the 60 highest dividend yielding constituents of the stocks of the S&P Composite 1500® Index that have increased dividends every year for at least 25 consecutive years. These stocks have both capital growth and dividend income characteristics, as opposed to stocks that are pure yield, or pure capital oriented.

[mawilson 2,133]

BNY does look interesting, so I'll keep it on my radar.

It's great if you live in New York, since it's exempt from Federal, New York State and New York City personal income taxes. There must be a similar ETF for Illinois.

I agree with you that Nathan's suggestion (DPO) is too undiversified. SDY is safer.