Too Much Of A Good Thing?
Mae West said, “Too much of a good thing is wonderful.” The Dow Jones Industrial Average closed at 21,796 on July 27. 2017, after setting 46 new record closing highs since the 2016 presidential election. That pits the Dow up 10% since the beginning of the year. Nice, although it was up 27 % for the first full year of President Obama’s second term.
As this suggests, political news events that are fodder to the media are often disconnected from the forces that move stock prices. With almost half of the S&P 500 having reported, three-quarters of these companies are beating their estimates. Year-to-year earnings growth is running around 8%, good but actually a slight slowing.
With a good run behind them, investors are scrutinizing reports for any signs of slowing. Google’s parent, Alphabet (GOOGL-$965) was off 3% despite beating earnings estimates on hints of increasing costs. Among other stocks in the much-watched “FANG” group, Facebook and Netflix were strong. Amazon (AMZN-$1,046), the first violin in the quartet, made a new high, then tumbled as it beat sales estimates but missed on profits, not an unusual pattern for this remarkable company.
Among our other favorites, Amgen (AMGN-$172), Celgene (CELG-$136), Corning (GLW-$29) and Danaher (DHR-$81) each beat analyst estimates but dipped slightly on some sort of perceived worries about future sales. BlackRock (BLK-$426) missed estimates by a few pennies but remains on track for record annual earnings. They all remain as quality buys.
Edwards Lifesciences (EW-$118), a newer recommendation, blew through quarterly estimates of 88 cents with earnings of $1.08. Sales also beat estimates, driven by considerable growth in its newer transcatheter heart valve sales. The company increased its projections for sales and earnings both for the third quarter of 2017 and for the full year. We added to our positions.
The Federal Reserve met this week and did almost nothing, as predicted. It seemed to remain on course for another interest rate increase this fall even though it continues to express understandable concern at the economy’s inability to reach liftoff speed.
Fed policies prompted much of the stock market’s bull run after the Recession beginning in 2007-2008. Major financial institutions teetered on the brink of collapse and the Fed was highly instrumental in minimizing collateral damage. The economy received only modest fiscal boosting from the Congress and could still use more, such as the promised infrastructure spending.
Stocks took their customary cue from very low interest rates. When stock dividends yield more than bonds, it’s really a simple decision as to which is preferable. That was true for most of 2016, providing a logical basis for further stock market gains.
The spread is now slightly negative with the S&P 500 yielding 1.9% and the 10-year bond 2.2%. That is by no means unbalanced in market history, however, bonds became understandably in great demand when the Recession hit and global institutions developed huge appetites for bonds. The Fed indicated that it plans to reduce its bond positions and the European Central Bank is following suit. Selling bonds increases their yield, thus stocks are developing competition from bonds.
Investors should keep an eye on interest rates and their developing impact on the spread between bond and stock yields. Meanwhile, worrying less about daily fluctuations while concentrating on quality stocks will continue to work well. Building reserves for unexpected events is not a bad idea, again remembering Mae West whose name lives on in emergency life preservers.
Market dips will continue to present opportunities like Raven Industries (RAVN-$34), a nifty Sioux Falls, S.D. company that makes products for high-altitude research, improving agricultural efficiencies and providing environmental protections. Earnings report due in three weeks should show almost a double on earnings.
Quoting Mae West again, “One and one is two, and two and two is four, and five will get you ten if you know how to work it.”
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
