5 Things Every Investor Needs to Know About This Market

The third quarter is coming to an end, and after a rough summer, investors are looking for ways to end the year with a bang.

Last week, I discussed fresh picks for the autumn and I think those stocks will serve you well in the months ahead. But there is a lot going on in this market, and it’s important to understand exactly which factors are impacting stocks and what it means for you. This is why today I want to discuss current market conditions and what you need to know to navigate them.

The following are five tips I think every investor should know:

1. European Debt Clouds the Market

Last week, we saw the Dow tack on 500 points over the course of five days. Then, Monday, it fell more than 100 points. Much of the volatility can be attributed to concerns and optimism over Greece’s debt dilemma.

For months we’ve watched the saga unfold. Despite budget cuts and new policies, Greece has not been able to get a hold of its growing debt. The country’s impending default has raised concerns and sent markets reeling worldwide. Even with nations offering assistance to bailout Greece, it hasn’t been enough to pay off the country’s approximately $500 billion debt.

Greece hasn’t been the only European country in the news in recent months. Several — including Portugal, Spain and Germany — have had their own difficulties. Now that the European Central Bank is stepping in, further questions are arising. A debate over allowing the default vs. bailing out Greece’s troubled economy is raging. It is uncertain how each scenario will impact the European economy, and all the countries apart of it, in both the short term and long term.

So how does the European crisis impact us across the pond?

Well, we’ve already seen the weight it puts on the markets. A large part of the volatility they experienced this summer can be attributed to European economic news. The fact is U.S. businesses have close ties with European companies, as well as all across the globe. When one region is in trouble, the others feel the sting. Investors become understandably wary when global economic problems occur because it’s inevitable that the U.S. economy will experience some of the aftershocks.

But it’s important that investors remember that there are smart investments to make in the current market. I will discuss these a little later.

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2. Investors Don’t Like Weak U.S. Economic Reports

I’d be lying if I said European economic woes were the only ones filling investors’ minds. For months we’ve been hearing news that U.S. economic growth has slowed and weak reports have weighed on the markets.

Last week’s headlines didn’t exactly help brighten the outlook:

“Core PPI Remains Flat”

What PPI Measures: The price of goods at the wholesale level for August, and a first sign of inflation.

The Breakdown: The Bureau of Labor Statistics’ Producer Price Index remained flat in August, an outcome that economists expected. Energy prices fell by 1%, but food prices rose 1.1%, evening out the headline number. Core PPI, which excludes the price of food and oil (because they are volatile), rose 0.1%, which was a tenth less than expected. Apparel and footwear prices increased, but the following items decreased in price: new cars, computers and commercial finances. This is the first time in seven months that car prices have dipped.

The Bottom Line: Flat PPI is great news because investors who are frustrated with low interest rates will increasingly turn to stocks.

“Retail Sales Remain Flat”

Why Retails Sales Are Important: They are a good indicator of broad consumer spending patterns. Consumer spending is a major component of the U.S. economy.

The Breakdown: The Commerce Department reported that in August, retail sales were unchanged. Economists were hoping for a repeat of last month’s performance, so they forecast 0.2% growth. This month, flagging auto sales brought down the total figure; ex-autos, retail sales crept up 0.1%. Core retail sales, which exclude autos, gas and food, also were flat.

The Bottom Line: This month’s figures are disappointing — they suggest that consumer spending is sputtering. But, we shouldn’t hang our hats up yet. Considering how low consumer sentiment has been, retail sales are holding up well. However, some retail stocks are thriving nonetheless. Both Costco (NASDAQ:COST) and Limited (NYSE:LTD) posted better-than-average sales for the month of August. With other weekly reports pointing to strong retail growth in early September, I expect better numbers to come.

“Jobless Claims Rise More Than Expected”

Why We Care About Jobless Claims: They are an indicator of the direction of the job market. Increases in jobless claims show slowing job growth; decreases in claims signal accelerating job growth.

The Breakdown: The latest jobless claims ballooned from 417,000 to 428,000. Economists expected that jobless claims would drop to 411,000. Last week’s figure, originally 414,000, was revised up by 3,000.

The Bottom Line: Although this certainly isn’t good news, for once the stock market is too busy bargain-hunting to care — last Thursday, the Dow still closed up 186 points! A few weeks ago, numbers like these would have had a notable difference on the markets. I’m also relieved that last week’s numbers weren’t revised any higher — as fearsome as the storm was, Irene didn’t do much to upset job growth.

“CPI Rises More Than Expected”

What CPI Measures: The price level of a fixed market basket of goods and services purchased by consumers. CPI is the most popular inflation indicator, so this is a very important report that can move the market.

The Breakdown: In August, the Bureau of Labor Statistics’ Consumer Price Index rose by 0.4%, well above the 0.2% growth forecast by economists. Core CPI rose 0.2%, which was in line with the consensus estimate. The core figure was boosted by an increase in rental fees, auto prices and apparel prices. Economists now forecast that core CPI will grow 2.5% for the year, which is significantly higher than its cycle low of 0.6%.

The Bottom Line: Ouch! This is a bad headline that is at odds with the PPI report. This is one of the first signs that the Federal Reserve’s policy of keeping the federal funds rate at rock bottom could be encouraging inflation, but I doubt this will affect this week’s FOMC meeting too much because the committee is populated with doves.

“Industrial Production Rises More Than Expected”

What Industrial Production Measures: The index of Industrial Production measures the amount of output from the manufacturing, mining, electric and gas industries — three huge industries that literally power our economy.

What Capacity Utilization Measures: the rate at which potential output levels are being met or used. Displayed as a percentage, capacity utilization (use) levels give insight into the overall slack that is in the economy or a firm at a given point in time.

The Breakdown: The Federal Reserve reported that August industrial production rose 0.2%; economists expected it to remain flat. Capacity use rose a tenth to 77.4%, also beating out the consensus estimate of 77%. Manufacturing output rose 0.5%, following a 0.6% increase in July. Automobile manufacturing is up, and non-auto output is up 0.4%, following a 0.3% increase in July. Total output is growing at a much faster rate than during the last three months, where it grew a total of 0.2%.

The Bottom Line: This is very good news. It looks like manufacturing is finally getting back on its feet!

Remember, economic news is fleeting. Market behavior may sway on conflicting economic reports, but the lasting effects are temporary at best. I will say, however, that I am glad to see Industrial Production up. Pickup in the manufacturing sector is the predecessor to revitalization in other economic sectors.

3. Crank up the Volume, Welcome Everybody Back

The summer season is notorious for low trading volumes, which is why we see so much volatility during the summer months. Many investors extend their summer vacation to their trading activities. They pack up their portfolios and leave the market behind.

Come Labor Day this mood of the market changes — all those investors that closed up shop for summer open back up for business. With them comes a new wave of money that floods the market and pumps up trading volumes. This offers great opportunities for investors — especially those that stuck it out during the summer months.

Let’s take a look at the numbers. In July, during the peak of the summer season, the Dow’s trading volume hovered around the mid-to-high 3 billions. Since Sept. 1, volumes have held steady around the high 4 billion to low 5 billion range.

This number will continue to climb.

Companies are beginning to report third-quarter earnings. These reports will revitalize the market — building buying pressure and driving investors into making more trades. As the year comes to an end, investors will continue to act. They will want to pad their portfolios as much as possible to close out the year with a pocketful of profits.

With prices still low and the market on the verge of heating up, this is your chance to ensure you are on the track to big gains. The trick is knowing what type of positions will do well in the current market.

4. Large Dividend Stocks Are the Place to Be

I realize that many of you have probably been hesitant to buy new positions given the conditions I just detailed.

European debt and weak economic reports aside, there still are gems to gobble up out there.

Right now, the hottest stocks are large-cap dividend plays. This is because the volatility that ran rampant this summer has caused a flight to quality among investors. They want to load up on big, safe, dividend-paying companies — and in a hurry. In a typical year, we would expect the small caps to take off first, but the extreme volatility in stocks throughout the summer created massive demand for safety stocks.

Two of the reasons why the large caps are currently winning the market race are because of dividends and corporate buybacks. Smaller companies don’t tend to pay dividends. They put all their cash back into their rapidly expanding business. This is a smart strategy for small caps, but with the flight to safety that we just talked about, that makes big, solid, dividend-paying companies very attractive buys right now.

The second force working in the big blues’ favor is corporate buybacks. When companies buy back their stock, they automatically boost their earnings per share� for the upcoming quarter. Strong earnings excite analysts and investors and put the company in a better financial position.

I still expect relentless corporate stock buybacks by the end of the quarter (just like we had in late June at the end of the second quarter), as companies scramble to buy back their existing shares and boost their underlying earnings per share before the next earnings season begins mid-October.

Now is the time to load up on large, blue chip stocks. They will provide stability and great profits in the coming months.

5. Strike while the Iron is Hot and Buy, Buy, Buy

We’re in the midst of a perfect buying opportunity. Even with all the negative factors at play, the positive forces are taking over, and now is the time to jump in and build up your portfolio.

Investors are continuing to return to the market after their summer breaks. Trading volumes still haven’t returned to normal, and as a result there is a wealth of bargain-priced stocks waiting to be picked up. Last week’s 500-point jump in the Dow is a perfect example of investors essentially going on a shopping spree and grabbing up stocks at great prices. And this won’t be this last time.

Buying pressure is going to build ahead of next month’s earnings season. By taking advantage of the current lull in activity and prices you’ll be ahead of the game once earnings announcements begin to roll out and the next market breakout occurs. So, strike while the iron is hot now and buy, buy, buy!