SAN FRANCISCO (MarketWatch) — 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 U.S., 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? Read more: 10 money-making investment ideas for 2012.
1. Last year’s winners
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.
What to do: Global economic growth is an oxymoron at this point. Beef up holdings of large-cap U.S. stocks with solid growth prospects, strong cash flow and a history of hiking dividend payments.
Growth stocks should continue to top value stocks, while large-caps stay ahead of small-caps and U.S. equities outperform Europe. Meanwhile, 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 (US:OEX) , 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 (US
JIA) , the so-called Dogs of the Dow, were up 6.8% for the year through July 11, while the Dow itself rose 3.2%. AT&T Inc. (US:T) and Verizon Communications Inc. (US:VZ) are the top-two yielders in the Dow, and also the biggest percentage gainers.
2. Defensive stocks
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. Read more: Defensive stocks trade near 52-week highs.
