Stay On Target
Stocks finished May with a gain for the month of 1.2% on the S&P 500, bringing its progress this year to 10%. The Dow Jones Industrial Average was ahead slightly, holding above 21,000. The Nasdaq, which includes more technology stocks, was ahead 2.5%. This was the seventh consecutive monthly gain for the Nasdaq, its longest streak since 2013.
As stock averages flirt with new all-time highs, many investors seem baffled or frightened at the incongruities between front page and cable news reporting continuing disarray in the Trump Administration and the Congress. These understandable concerns overestimate the impact of political events on stock values and overlook the significance that less exciting financial and economic news on stock values.
Stock prices move in response to corporate profits. This year, first-quarter profits surged 14%, their highest rate since 2011. Concurrently, political news from Washington, Europe, China and even North Korea dominated the headlines. Emotional reactions are always a barrier to investment success. Many who were opposed to President Obama missed out on the stock market’s long bull run while others today who believe the current Administration is taking the country down are assuming that stock prices will follow.
It is mistake to view the stock market as a refection of one’s own ideological beliefs. Real economic shocks like the Depression that took unemployment to 25%, surging inflation in the 1980’s, failing savings and loans and emerging market debt and the recent housing finance crisis were only a few of the real economic shocks that mattered more than the political battles that captured our attention.
Headline news drove investors toward the Iran hostage crisis, riots at the 1968 Democratic convention, President Nixon’s impeachment and resignation, Iran-Contra scandals, President Clinton’s Monica Lewinsky affair, and gridlock in Washington. These absorbed our attention, yet despite all this theatrical political theater and violence, the economy has grown, living conditions have improved and stock prices are near records because so are corporate profits. Those fortunate enough to have sufficient assets for investing have more cause for gratitude than fear and should not forget those not so lucky.
Stocks will be buffeted by events like interest rate increases, which appear increasingly likely in the near future. After a strong April job report, the probabilities have increased of a rate hike at the Federal Reserve June 14 meeting. This would pave the way for another quarter-point raise later this year with more to follow in 2018 and 2019, eventually leading to the Fed’s targeted federal funds rate of 3%, up from today’s 1%.
Among our stocks, Apple (AAPL-$152) continues its leadership. It may introduce new hardware at a developer’s conference beginning June 5. It seems on track for around 10% earnings growth this year, remarkable for a company of its size. Apple recently increased its quarterly dividend by 10.5% to $.63.
Amazon (AMZN-$994) touched the magic $1,000 mark. Its next earnings report is due the end of July and current estimates are in an unusually broad range of $1.04 to $2.25. Last year, it reported $1.78, a level it probably needs to beat to continue its current momentum.
Bank stocks hit a headwind after Goldman Sachs signaled a slump in its trading profits. Trading is a wobbly base for steady profit growth, which is more inherent in JP Morgan Chase (JPM-$82) and Bank of America (BAC-$22). Investment bank Morgan Stanley (MS-$42), asset manager BlackRock (BLK-$412) and increasingly dominant Visa (V-$95) continue as leaders.
Novo-Nordisk (NVO-$43), the global leader in diabetes care, sagged last year on disappointing earnings. It recently beat estimates for the first quarter, obtained FDA approval for a new hemophilia treatment and is back on its old growth path.
Broadcom (AVGO-$235) will announce earnings shortly. I expect favorable results, possibly accompanied by a dividend increase. This is a leading stock in a leading sector.
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
