Upward Trends
Two surprises touched off a surging stock market rally. First, Mr. Trump’s win was the biggest upset since the 1980 Olympics, when the US Ice Hockey team took a 4-3 win over the previously unstoppable team from the USSR. Second, Wall Street media had almost unanimously forecast market disaster in the event of what they believed was a highly improbable upset win.
The improbables arrived and with them a market surge that took the Dow Jones Industrial Average knocking at the mystical level of 20,000. “Don’t fight the tape,” a legendary Wall Street maxim, argues that the upward trends will continue. Trends typically overshoot, inviting the Federal Reserve to tap on the brakes. “Don’t fight the Fed,” another maxim, is pertinent now.
The Fed’s quarter-point raise this week to a 0.50%-0.75% range was widely predicted but this expected action seemed to be a surprise to some and stocks took a mild hit before resuming their march to 20,000. The Fed’s accompanying remarks implied three more quarter-point bumps over each of the next three years, which would take the fed-funds rate to 2.9% in 2019.
After a brief pause, stocks surged again as investors decided not to think about 2019 for now. Higher rates strengthened the dollar to its highest exchange rate in 13 years. While this may trouble exports, banks and other financial sector stocks continued their uptrends.
Morgan Stanley (MS-$43) and JP Morgan Chase (JPM-$86) are the quality leaders. Visa (V-$79) lags but will be buoyed by a solid start to holiday spending. Online spending is strong and Amazon (AMZN-$762) continues to gain market share. Apple (AAPL-$116) is gaining momentum in advance of its next quarterly report coming in late January.
Investors are pushing market averages to new highs as beliefs develop that the new Administration will benefit business and the economy. Even before it takes office, investors are embracing the prospects of tax cuts, reduced regulatory restrictions and fiscal stimulus. These are on top of existing trends of improving corporate earnings, accelerating U.S economic growth and an improving labor market. Combined, these are shoring up investor and consumer confidence, vital elements for a continuing bull market.
Stock selection is still key. Investors who hold traditional balanced portfolios of bonds, utilities, medical and energy stocks are probably wondering what rallies we are discussing. Rising interest rates torpedo interest-sensitive investments, particularly bonds and other fixed-rare issues. Bonds are a great investment when interest rates begin to decline. That happened last when the Fed began bailing out the economy in 2008 and this opportunity will not return for years.
Oil and gas stocks had a mild flurry of activity after the recent OPEC meeting but the global supply and demand ratios remain huge obstacles to their ever regaining their old investment prominence.
General Motors (GM-$36) is rebuilding from the embers of its 2009 bankruptcy. It just delivered to retail customers the first models of its all-electric Chevy Bolt with a Tesla-like range over 200 miles between charges. GM has a lead of at least a year over Tesla’s promised mass-market Model 3.
It rubbed this in by delivering the first retail Bolts to customers in Freemont, California, three miles from Tesla’s massive factory. General Motors has a woman CEO and stock with a 4.2% dividend yield, 19% expected earnings growth this year and a P/E ratio of only 6. It’s a strong buy. Fiat Chrysler (FCAU-$8) has been unsuccessful in trying to persuade GM to buy it. On its own, it’s a speculative buy with a P/E of 4.
Media fuss will build as the Dow punches through 20,000. Investors should remember that the Dow represents only a smattering of thousands of stocks that make up the market. It is price weighted, unlike the S&P 500, and any move in one of its thirty components may have an exaggerated effect. For example, Goldman Sachs (GS-$243) shares soared recently, making up one-third of the Dow’s recent 1000-point move since hitting 19,000 on November 22.
1,000-point moves aren’t what they used to be. From 19,000 to 20,000 is 5% but 1,000 to 2,000 in 1987 was 50% and took 14 years. Still, it looks like investors will celebrate with Dow 20,000 in their stocks socks.
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 1995. [email protected] 949.494.1376/800.697.2622
