He Keeps On Rollin’ Along
The stock market continues to add momentum. After ringing up twelve straight record highs on the Dow Jones Industrial Average, it paused – for all of one day-and then gained over 300 points to close above 21,000. Only a month ago, market commentators were babbling about the magic 20,000 and now look what happened!
Investors should remember Baron Nathan Rothschild’s comment, “I will tell you my secret if you wish. It is this: I never buy at the bottom and I always sell too soon.” Blending this as best we can to Warren [should also be Baron] Buffett’s saying, “Be fearful when others are greedy and greedy when others are fearful” points us to trying to determine if “others” [not us, of course] are presently greedy or fearful.
Baron Buffett’s precepts and examples are always meaningful. It is not easy to assess the overall moods of investors but moving against the crowd is worth the effort. After all, this may avoid panicked selling or frenzied buying, neither ever a successful investment strategy.
There are some objective factors fueling the market’s surge. A year ago, the world’s economies seemed trapped in the mire of low growth. The suggestion that the Federal Reserve would raise interest rates stifled market rallies. Developing populist political insurgencies seemed to threaten stock markets.
Now, interest rates have risen and stocks seem indifferent to the probability that the Fed will kick rates up later this month. All this is taking place in the midst of varied uncertainties emerging from the irregular pace of the new Administration taking power.
What seems to be encouraging Wall Street is a belief that the President Trump will steer away from populist actions as his Administration pursues conventional Republican pro-business policies of reducing taxes and easing regulations. For example, the promise to negotiate lower drug prices seemed to disappear after a meeting with executives from the big pharmaceutical companies.
All this is set in an environment of an increasingly stronger economy. The Financial Crisis left deep scars here and in other developed nations like Germany but momentum was shifting before the recent election. There have been over six years of job growth, the unemployment rate just fell below five percent for the first time since the Crisis, interest rates and inflation are low and corporate profits are strong.
Some market analysts predicted last fall that a Trump victory would take two thousand points off Dow. Instead, it’s up thirteen percent. This unexpected result is producing the market’s usual overshoot. Even robust rising earnings are lagging advances in stock prices.
The S&P 500 is currently at 25 times the trailing (actual) earnings of its components, far from a record but above its historical range. Two-thirds of its 500 components beat estimates for the recent quarter and earnings, an encouraging sign.
The new IPO of Snap (SNAP-$25) flashed a warning reminder of the dot-com bubble. The Venice, CA based company offers Snapchat, a camera application enabling mobile communicating of images and video. It is popular among teenagers, a consumer group without consistent buying demand since the Beatles broke up. The IPO priced the company, for whom no profits are expected soon, at $17, a valuation of $24 billion.
In contrast, Mr. Buffett buys and keeps stocks in substantial companies with proven high earnings rates. His record is exemplary and investors would do well to emulate him with stocks like Apple (AAPL-$138), his newest position and our largest. Other best- run tech companies like Broadcom (AVGO-$217), which just beat analyst estimates, will continue their leadership. So will other leaders like Amgen (AMGN-$177), Amazon (AMZN-$848), Applied Materials (AMAT-$36), Celgene (CELG-$122), Morgan Chase (JPM-$92), Morgan Stanley (MS-$46) and Visa (V-$88). These will make the ride enjoyable.
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
