Powering Ahead
Stocks continue the positive momentum that they acquired in November with the major stock indexes closing at record levels for five straight sessions. January 3, 1992 was the last time all three major indexes made five consecutive sessions. They even extended the streak to six then, bringing the Dow to what probably seemed a dizzy height of 3,201. Today, the popular Dow Jones Industrial Average stands around 20,600, a nice margin above the 20,000 level that invoked so much recent publicity.
In testimony before the House Financial Services Committee, Fed Chair Janet Yellen gave a concise explanation of the enthusiasm that has boosted the stock market. “I think market participants likely are anticipating shifts in fiscal policy that stimulate growth and perhaps raise earnings.” Investors drive stocks higher on anticipations, currently expectations that the new Administration will implement pro-business measures, including eased bank regulations, increased spending on infrastructure and tax cuts.
These hopes diverted investor attention from the Chairwoman’s prior testimony before a Senate committee when she implied that existing conditions could make an interest rate increase possible as soon as the Fed’s next policy meeting in March. That prospect would normally send stocks tumbling down but stock investors exhibit high levels of attention deficits and the market will probably retain its momentum until interrupted by some event, quite possibly the first of an indicated series of interest rate increases by the Federal Reserve.
Regardless of overall market impulses, investment success will be enhanced by foresighted selection of business sectors and individual stocks. Among sectors, oil and gas stocks are off their bottoms but oil prices peaked at $147 in 2008 and trade now in the low $50s per barrel, hardly encouraging price trends.
Once, oil and gas stocks were core positions in stock portfolios and the size of this sector still provides fodder for media chatter about future oil prices. However, with massive development of the shale oil industry, energy supplies are no longer constrained by global politics; energy price growth will thus be slow with the World Bank forecasting that it will take a decade to reach prices in the $70s.
Retail sales exceeded forecasts last month although these were aided by heavy discounting. Many retailers are zombies on the brink of bankruptcy under price pressures and online competition. E-commerce sales are headed for $500 billion next year and Amazon (AMZN-$842) took 43 percent of all online sales in 2016, up from 33 percent in 2015.
Previously, it was unheard of in the retail industry for one company to have market share of 40 percent or more. Amazon’s growth varies over the quarterly periods on which Wall Street analysts obsess and longer-range perspective shows its value. Over five years, Amazon grew at 38 percent per annum and can probably keep up that pace for the next five years. The P.E. is sky high but so is its growth. Its current record high price will not be its last and its stock is a core position.
Apple (AAPL-$135) is similar in its unique history of blending advancing technology with creating consumer demand. A few months ago, it was trading in the $90s and wimpy critics were questioning its growth. Innovators who build companies like Apple and Amazon relate to critics as dogs do to trees.
Warren Buffett’s Berkshire Hathaway recently added $6.6 billion of Apple stock. Mr. Buffett has an exemplary eye for companies that generate cash and Apple has a cash cache of $246 billion. Much of this is overseas and might be repatriated should favorable tax law changes emerge.
Still in the “A’s,” Amgen (AMGN-$170) reported progress in FDA approval for a new leukemia drug and Applied Materials (AMAT-$35) blew through analyst estimates for quarterly sales and earnings. Both are leaders in advanced technologies, both are reasonably valued and both are buys.
Huntington Ingalls (HII-$209, the nation’s largest naval shipbuilder, powered through earnings estimates, which called for $2.48 for the fourth quarter. The company reported $3.67 per share. The company will participate in the Navy’s proposed shipbuilding boom, the biggest since the end of the Cold War. Its contracts include a new carrier class led by the Gerald R. Ford.
President Ford helped heal a divided nation, saying “Our Constitution works. Our great republic is a government of laws, not of men.” He also said, “If Lincoln were alive today, he would be turning over in his grave.
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
