Some prolonged downside is exactly what this stock market needs—a market that's been looking for a catalyst to sell for quite some time.
While there has been pressure on long-term interest rates, we still have virtual monetary certainty this year with the Fed funds rate staying where it is. Weakness abroad in China is still a story of overcapacity, but there has been some refreshing economic data out of the eurozone.
What's clear in Western economies is that positive economic data is sporadic and mostly without trend. The lack of consistency in mature economies has equity investors in a bit of a loop. Ten percent downside across the main stock market indices would be a healthy development for the long-term trend. We never did get a stock market correction last year, only consolidation, as investors were only too happy to keep buying.
Fourth-quarter earnings season has been modest so far, with outperformance (according to Wall Street) mostly coming in at the bottom-line, meaning that genuine sales growth is still a very tough thing to accomplish. Furthermore, a lot of corporations aren't guiding 2014 above previous outlooks, and this makes it very difficult to be a new buyer.
Global capital markets are gyrating on a reassessment of investment risk and the prospect for real economic growth. Add in currency volatility, and there are the makings of a flight to the U.S. dollar and a sell-off in the stock market.
Still, the most important data now is what corporations actually say about their businesses. Beating the Street is less important than a true assessment of business conditions and expectations for the future. Many important benchmark companies are, once again, reporting solid numbers.
Union Pacific Corporation (UNP) is always a benchmark worth following. The company's shares just broke through another stock market high after management announced a record fourth quarter and fiscal year.
The company's diluted earnings per share grew 14% to $9.42 during 2013 and 16% to $2.55 in the fourth quarter. Operating revenues showed solid growth of seven percent to $5.6 billion, representing both volume growth and pricing gains.
Fourth-quarter agriculture freight revenues grew 19%, while automotive and industrial products grew 17% and 14%, respectively. These are very good gains and are actually quite surprising.
Naturally, management played its 2014 outlook conservatively, expecting slow but positive economic growth this year. The company increased its dividend to shareholders by 19% to $2.96 per share last year, which is a material development.
While there are not a lot of reasons to be buying this stock market, I'm still an advocate of sticking with existing winners and dividend income is extremely important. (See "Stock Market Focus to Shift in 2014.")
The most efficient corporations are going to be able to translate single-digit revenue growth into double-digit earnings this year. But with this in mind, 2013's stock market performance was so unusual in its capital gain that dividend income may very well be the only return on investment this year.
Expect more near-term gyrations in the U.S. stock market, global currencies, and emerging markets. It's part of the process of the global financial system trying to balance itself out after an extraordinary year.
This article Is This the Correction Investors Have Been Waiting For? Was originally posted at Profit Confidential.