Taking Stock

Tony Crowell

Tony Crowell

Dow Jones 15,000 ?

Another week, another record for the Dow Jones Industrial Average. Despite media excitement, this is all remarkably average for bull markets. This bull market, the 24th since 1890, began out of the lows of March 2009 and is up more than 120% since than. Four years is not especially a long bull market period; the last bull market began in October 1990 and lasted about nine years. After that, it was a long dry spell with little progress in the general market until the global financial crisis of 2007-2008 drove the markets to unusually low valuations.

Currently, not only is the Dow Jones Average flirting with new highs almost daily but the much more representative S&P 500 average is only a couple of points away from its closing high of 1565 set back in October 2007. It will take only a modest burst of buying for the S&P to join the DJIA. After that, the next publicized challenge will be for 15,000 on the DJIA.

Shifting to probabilities, long-range studies of stock market performance by Wharton School Professor Jeremy Siegel point to further highs. His research indicates that there are at least seven chances out of ten that the DJIA will finish the year above 15,000. His work shows an even chance that we will see a close above 17,000 by year-end 2014.

These studies go back to 1871 and include rolling returns from five years to thirty. While some five-year and even ten-year cycles have been negative, all twenty-year or longer cycles were positive. Five-year cycles of below average returns were usually followed by periods of above average returns.

Even with the good market performance so far this year, the return for the five years ending on March 5 ranks in the lowest third of all five-year cycles. The median return after such subpar five-year cycles has been 14.5% over the following two years. Growth in the markets at anything near that would easily take the Dow Jones average over 17,000 by year-end 2014.

Stocks do better than inflation over the long run largely due to rising profits driven by real growth in the economy. Growth, while remaining positive, has been weak since the financial crisis. Economic recovery, aided by Federal Reserve policies, now shows some signs of mild acceleration. Public sentiment, particularly among retail investors, remains fearful with weak buying levels of stock mutual funds. (Those investors, who tend to buy high and sell low, are still buying bond mutual funds, a sucker bet.)

The usual danger to bull markets is a combination of excessive optimism coupled with excessive stock valuations. Sensible investing demands continued building of positions in growing companies with above average prospects. Recent buys meeting these criteria include BlackRock (BLK-$255), Chicago Bridge & Iron (CBI-$57), Celgene (CELG-$114), Deere (DE-$92), Eastman Chemical (EMN-$73), Int’l Business Machines (IBM-$215, Oceaneering (OII-$64), Syngenta (SYT-$87), Union Pacific (UNP-$141) and Worthington (WOR-$29).

All of these are making or approaching new highs, among them IBM. Its recent all-time high is particularly noteworthy in view of its leadership position. I expect Home Depot (HD-$70) and Motorola Solutions to follow this pattern and am adding both as new buy recommendations.

Home Depot, the well-known home improvement retailer, has over 2,200 stores in North America and China. Its sales will benefit from the developing recovery in the housing industry. Earnings are growing steadily in a 13-15% range and are forecast at $3.52 for its fiscal year ending next January.

Motorola Solutions descends from the old Motorola, which foundered on an overly ambitious globally satellite phone venture named Iridium. This went bankrupt in 1999. (The concept survives as an independent company called Iridium Comm. (IRID-$6), an interesting small cap speculation.) Motorola Solutions operates in two segments, Government and Enterprise. Sales are almost $9 billion, increasing at 6%, with earnings growing faster.

It forecasts earnings around $3.29, up 17%, for all of 2013. Both it and Home Depot offer dividend yields slightly under 2% with increases highly probable for both. Probabilities should play a major role in investment decisions. They now indicate keeping our course and even adding a bit more speed.

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 1993. [email protected] 949.494.1376/







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