After what seemed like six months but was really six weeks, the stock market attempted to break its slide. No matter that it had climbed for three years before pausing, it still lifts spirits to see some up moves. These have so far lacked conviction but the market is fishing around for a bottom. I expect it to churn around 12,000 on the Dow Industrials for the rest of the summer, coming alive in the fall with a run through 13,000.
One problem with a market like that is the effect on investor nerves. Stock market gyrations are an easy subject for news reporting and their continuing repetitions often make investors feel they should buy or sell something even though the best tactic is usually to hang onto well chosen solid stocks through all these fluctuations.
Even worse, the psychological reaction from up days seems to be to prompt a desire to buy stocks while down days spark thoughts of selling. These may be natural reactions but professional traders do the opposite. Investors should try to induce discipline rather than emotion, by trying to plan ahead rather than reacting to the market.
The future is still cloudy for the housing industry and closely related financial stocks. I would thus use up days to shuck off any remaining stocks in this group, including bank and investment banking stocks.
The stock market is much more of American’s personal financial profiles than it was a generation ago and its current sloppiness will infect consumer attitudes. With many personal financial statements already depressed by sagging home prices, I doubt whether recent strength in retail stocks can be sustained. Market rallies this summer should provide decent opportunities to exit these stocks, probably returning in the fall.
With interest rates continuing at near-record lows, money market funds lack interest. Bond funds like WF Advantage Multi Sector (ERC-$15) or Western Asset Global Corporate (GDO-$18) are more attractive. Each of these funds currently offers an 8% yield, paid monthly). These will fluctuate slightly although not necessarily to investor disadvantage.
The danger to bond funds is not the credit risk to their underlying holdings but the interest rate risk to principal values that will ultimately manifest itself from higher rates. The Federal Reserve will not put these brakes on until the economic recovery gathers considerably more momentum, probably not until 2012 or even 2013.
That should prompt investors to give some thought toward the eventual return of stronger inflation with its inherent boost to the prices of commodities and other hard industrial assets. One of the strongest stocks that will benefit will be BHP Billiton (BHP-$88), the very large Australia-based natural resources exploration company. I don’t expect its stock price to resume strong growth for a while but investors with longer-range perspectives can begin establishing positions. A 2% yield and history of increasing dividends makes it a good position in retirement accounts.
DuPont (DD-$49), one of the larger positions in my portfolios, is a buy. Its traditional lines are not standouts in the current economy but DuPont has been steadily reshaping itself into agriculture, foodstuffs and other more dynamic sectors. Its new buy of a Danish bio-based enzyme company will increase its agribusiness sales from the current 28%. A woman CEO is another sign of modern thinking.
Sales are $33 billion, growing in the high single digits. Earnings are growing faster, the P/E is a modest 11 and its yield is 3.3%. Syngenta (SYT-$65) and Bunge (BG-$65) are more aggressive buys in the international agriculture sector. Waste Management (WM-$36) is another steady stock for unsteady markets. Disciplined investing pays well, especially in unsteady times.
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