It would not be surprising to see the stock market correct in the near term, especially if third-quarter earnings and guidance from companies underwhelm investors, suggests dividend reinvestment specialist Chuck Carlson, editor of DRIP Investor.
However, investors should not get chased out of stocks should a correction occur. Rather, a market pullback should be viewed as an opportunity to strengthen portfolios by adding quality stocks on decline.
Several reasons exist to be a bit nervous about the short-term market trend:
- Consumer sentiment has taken a negative turn, with the University of Michigan Consumer Sentiment Index around decade lows.
- A number of companies have indicated growth is slowing and costs are mounting.
- Taxes are likely to rise, though by how much and for whom is still not clear.
- Covid, driven by the Delta variant, continues to be a headwind for economies throughout the globe.
- The likelihood of Fed tightening by year-end or early 2022 may pose some challenges for the stock market.
- The economically sensitive Dow Jones Transportation Average has been especially weak.
Add all this up (and I’m sure I’ve forgotten a few things) and you have a recipe for a market correction. Notice I said “correction” and not necessarily a bear market. Indeed, there is still much to like about the long-term market trend:
- Interest rates remain at levels that present little competition for equities.
- The last major signal under the Dow Theory was bullish, meaning the market’s primary trend — the trend that typically lasts a minimum 12 to 18 months — is still positive.
Still, the market feels a bit heavy in the near term, and it would not be surprising to see a 5% to 8% pullback over the next six weeks or so.
Should such a pullback occur, rest assured there will be plenty of panic selling by investors who are fearful of losing the big gains achieved this year. Don’t be among those panic sellers. Instead, take advantage of the correction to pick up quality merchandise at cheaper prices.
All of you reading this newsletter should always — I repeat, always — have a “watch list” of stocks at the ready to buy on declines. A “watch list” may include stocks you already own and are itching to buy more on weakness, as well as stocks you don’t own but would love to buy at lower prices.
If you don’t have such a list, here are 12 stocks to consider as you assemble a watch list (all of these stocks offer direct-purchase plans whereby any investor may buy the first share and every share directly):
- Alphabet (GOOGL) — Alphabet is one of my favorite stocks for long-term gains. I own these shares and would love to buy more on weakness.
- Amazon (AMZN) — I welcome the opportunity to pick up more shares of Amazon on weakness.
- Applied Materials (AMAT) — This semiconductor-equipment giant offers good value and excellent growth potential.
- Costco Wholesale (COST) — If you don’t have retail exposure, Costco should be a must-buy during a market correction.
- Danaher (DHR) — Danaher is a blue-chip player in the diagnostics and research market.
- Dover (DOV) — Dover is my favorite mini con- glomerate and should be an impressive performer over the long term.
- Microsoft (MSFT) — Microsoft recently an- nounced an 11% dividend hike and a $60 billion stock buyback.
- Novo Nordisk (NVO) — Novo Nordisk is a major player in diabetes treatment and one of the best- positioned health-care stocks in the market. For more on Novo Nordisk, see page 7.
- PayPal Holdings (PYPL) — You should have exposure to the payments sector in your portfolio, and PayPal gives you a fast-growing player in this market.
- Qualcomm (QCOM) — Yielding 2%, Qualcomm is a quality growth-and-income play.
- S&P Global (SPGI) — S&P Global provides a variety of ways to play the capital markets and would be an excellent addition to a portfolio on any weakness.
- Zoetis (ZTS) — This leading animal health-care play is rarely cheap, so investors would do well to take advantage of any pullbacks.
