Investors Return to The Markets

Could it be that investors’ love affair with the stock market has rekindled? The Dow Jones Industrial Average (DJIA) has broken 11,000 for the first time in five years, and market experts note that individual investors are back in the market in a big way - possibly because the real estate market is cooling somewhat. Discount brokerage houses are reporting a pronounced increase in trading activity from smaller investors, suggesting that stocks are hot - again. The first couple of months of 2006 saw almost $51 billion of new money flow into stock mutual funds. This time, mutual fund investors are eyeing overseas markets keenly, with about 70 percent of this new influx of capital going to international funds.

April gave investors reason to cheer. And at a time with great first-quarter earnings news, it was cheering for investors to see that positive earnings results were not confined to energy companies. Of course, the other sectors are nowhere near the energy sector’s anticipated whopping 39 percent earnings growth, but the telecommunications sector is expected to post an overall growth rate of around 21 percent, and information technology is projected to hit 17 percent or more. Other growth areas include construction materials and gold.

Not all sectors fared well. Many Wall Street commentators expect utilities to stay in the earnings doldrums, and forecast the same for consumer staples, particularly if the housing market begins to soften and gas prices remain high.

Regular Dividend Payments
Some experts believe that the upswing in investor interest was jump started by the launch in 2003 of tax cuts on "qualified" dividends. As a result of this change in the tax code, more companies have been paying dividends and increasing the size of their payouts. Even the technology sector, traditionally averse to paying dividends, has joined the dividend-paying camp, with major players like Microsoft and Sabre Holdings rewarding stockholders with regular dividend payments.

Investment advisors are already looking ahead to 2008 and anticipating a return to pre-2003 tax conditions. If the dividend tax cut and other cuts disappear, deficit anxiety will be the most likely culprit. The President and Congress will have to deal with the budget deficit at some juncture - sooner rather than later if foreigners become weary of funding our debt - and spending cuts alongside tax increases are the most likely remedy. If taxation rates on investment income increase, and taxes governing dividends and capital gains revert to higher rates after 2008, some experts fear that dividend payments will decline, too. Companies traditionally have been adverse to paying dividends when the taxation rates on dividends are high, arguing that it makes better business sense to reinvest cash in the business, boost profits, and thereby reward shareholders with increasingly valuable share holdings.

Whatever the outcome in 2008, stocks are once again in favor, and international markets are attracting keen interest. For the moment, terrific earnings results from leading U.S. companies have banished the year’s earlier gloom - optimism rules.

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