renaissance

Taking Stock

Tony Crowell

Election Coming; What’s Next?

Stocks continue on track for their best August in 20 years. No major developments have taken place recently in the problems of the Euro Zone or of the “fiscal cliff” here, so the market’s strength may be a reaction to an unaccustomed absence of bad news. Whatever the reason, an improved tone is apparent in the attitude of investors, who are receiving company reports with more optimism.

The market (S&P 500) is up 11% this year and is approaching its high of the spring. Momentum will probably take it through that mark but the often-difficult months of September and October lie ahead. That takes us to November and readers have asked me what impact the election will have on stocks.

Market history indicates that the election is almost irrelevant to stock prices with more complex factors such as company earnings, geopolitical turmoil, Fed policy and other complications dominating stock returns, as they invariably do. Barring a totally unexpected outcome, such as the hanging chad delayed decision in 2004, the election will have far less impact than the forthcoming competing cries for our attention of political soothsayers would have us believe.

Many investors perpetually search for some sort of magic indicator to predict stock market behavior. None has survived objective scrutiny. If correlation equated with causation, we could rely on the Super Bowl indictor, which predicts an up market if the team that wins the Super Bowl has its roots in the original NFL, the market will have an up year. This has over an 80% record of success and the victory by the Giants last January forecasts an up year.

An investor obsessed with political spin who foresees a Democratic victory might emphasize health care, including generic drugs, as well as alternative energy stocks. A Republican victory could be viewed as benefitting traditional energy companies and defense contractors. These are hardly clear-cut distinctions, will be further blurred by Congressional races and are probably already anticipated by institutions and other professional investors.

The real question for investors is what stocks to hold, regardless of the election outcome. This is where individual investors have an advantage over the frenzied short-term trading of the pros, provided they take advantage of longer perspective without reacting to the sirens of short-term news events.

The stresses of major global economic changes continue to give an advantage to larger companies. Traditional stock market research showed better returns for smaller company stocks but big cap stocks lead in recent years. Superior earnings performance is essential. In selecting stocks, I cheerfully admit stock selection snobbery and greatly prefer companies like Apple and IBM to habitual underachievers like Hewlett-Packard, Microsoft or Dell.

Simon Property Group (SPG-$157) is the largest real estate company in the world. It owns 336 substantial retail properties in North American and Asia comprising 244 million square feet. Like the entire retail industry, it was battered by the financial crisis but its financial and management strengths have propelled it to new highs in sales and earnings.

The company recently raised its dividend for the fourth consecutive quarter and also raised its guidance for 2012. It now yields 2.6% with further dividend increases lying ahead. Simon’s stock holds a higher ratio to book value than competitors like General Growth or Vornado as a result of its staying power and steadier sales.

I sold our positions in American Vanguard, a Newport Beach-based manufacturer of specialty agriculture chemicals. Its stock did well for us and I hope to revisit it but the current record drought in this country may impact its sales.

Several months ago, many stock market commentators looked for a repeat market this year of 2011, which did well for the first six months and then faded. The absurd political maneuvering over the “debt crisis” fueled a loss last year in investor confidence, which was a severe blow to everyone’s confidence and killed the returns for the full year. This year’s market got off to a similar good start, backed off in the spring, and is now showing running ahead of last year as the economy continues its sluggish but uninterrupted recovery. The Presidential election will be hyped as an impeding financial crisis. It isn’t. The U.S. economy has absorbed worse shocks than this election and so will its stock market.

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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