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Taking Stock

Tony Crowell

Election Year And Stocks

Turbulent currents continue to make the stock market work slowly upstream. Troubling news from the Euro Zone pushed stocks back this summer although the market (S&P 500) is still eight percent ahead for the year so far as we approach August, historically the least volatile month for stocks.

Readers have asked me about the historical correlation of Presidential elections with the stock market. The strongest year has typically been the year before the election although the market went nowhere last year. Election year has been the second best. Since 1928, stocks have been down in only hree election years: 1940 (war coming), 2000 (contested election) and 2008 (global financial crisis).

There may be a supporting aspect to these results from incumbent presidents using economic stimulants to encourage the economy. Such stimulus is blocked this year and stocks will have to make their way based on earnings, always their fundamental support.

About a third of the companies that make up the S&P 500 have reported with well over half reporting “better than expectations.” That’s not as good as it may sound as many analysts had lowered the bar to avoid embarrassment. In many cases, earnings per share met or even exceeded expectations while sales fell short. That’s largely due to the abilities of many companies to squeeze out higher profit margins; such gains seem unsustainable.

Many had hoped that this earnings season would get a boost from Apple but it delivered one its rare earnings disappointments, only the second in ten years. It sold 26 million iPhones in the quarter, up 28% from last year but down from the 35 million it sold in the March quarter. Overall sales were up 22% from last year to $35 billion but down from 59% growth in the earlier quarter. Quarterly earnings were $8.8 billion or $9.32 a share, a dollar below analyst estimates.

The iPhone is its largest revenue generator and its stumble seems due to a tricky transition from the current model to a new version expected later this year. The weak European economy also affected sales. Looking ahead, the company is on track for earnings somewhere in the $45-$50 range for its full fiscal year, which ends in September. Its stock remains very reasonably valued for such a successful company and payment of the new dividend of $2.65 on August 16 will be reassuring.

Apple’s first quarter earnings came to $13 billion, impressive but quietly eclipsed by Exxon’s $15.9 billion. Part of this was due to divestitures but Exxon (XOM-$86) has earned a staggering total of $161 billion since the beginning of 2008. Profits over the next year will be lower as the sputtering global economy drags down prices of oil and natural gas. Exxon plans to spend $37 billion over each of the next five years exploring new energy sources worldwide.

Exxon’s huge global exploration efforts have not prompted it to lose sight of its shareholders. It increased its dividend this spring for the twenty-ninth straight year and currently yields 2.7%. Any investor who would prefer a 30-year Treasury bond with its current 2.5% yield is so insecure that only professional therapy could help.

Investors can put up a good shield against the insecurities provoked by never ending crisis news if they anchor their investments with stocks like Apple and Exxon. IBM (IBM-$194) is an appropriate addition. TJX (TJX-$44) adds a consumer stock and U.S. Bancorp (USB-$34) one of the scarce steady and well-run financial stocks.

Medical stock prices are running ahead of the general market as investors are again warming to their increasing sales and investments into research. Merck (MRK-$43), Bristol-Myers (BMY-$36) and Novo-Nordisk (NVO-$150) continue to be rewarding favorites among my clients’ portfolios. They, like all the other stocks mentioned here, have excellent dividend records.

With company forecasts pointing to slower revenue growth in the current quarter, the market may lapse into a sluggish range, probably overreacting to Euro Zone developments and competing campaign cries of impending doom here. Building up some cash reserves during this period might be useful. MFS Income Trust (CMK-$9-5.2% yield) and CBRE Real Estate Trust (IGR-$8-5.5% yield) continue to be rewarding for reserve funds.

Tony Crowell manages stock portfolios for individuals and their trust and retirement accounts with CROWELL•ROBERTS Investment Counsel, a registered investment advisor in Laguna Beach since 1993. [email protected] 949.494.1376/

800.697.2622 www.crowellroberts.com

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