For the last three years, the favorite phrase of many Wall Street traders has been “Sell in May and go away.” Like most sayings that seem to offer clear direction in a few words, actual results may differ. Traders who have been waiting for a 5-10% “correction” to jump back in the market are still waiting. Meanwhile, the S&P 500 average is up 14% this year after breaking through 1,600. The popular Dow Jones Industrial Average finally made its way above 15,000 and is still hanging in there.
There are some clues that suggest the long awaited correction already took place earlier this year. In March, as the Dow Industrials first made a new high, mutual fund investors shifted to buying for the first time in years. As mutual fund investors typically buy at peaks and sell at lows, this was a negative market indicator of possible mistimed optimism. Bond yields were beginning to climb and so were gas prices while worries revived in the Euro Zone where bond yields also rose.
Most of these adverse trends have since reversed. Bond yields are back to their levels of last fall, gas prices are coming down and nervous mutual fund customers are back to selling. Economic recoveries ebb and flow and are impacted by events like weather that do not impact their underlying momentum. Central banks in the U.S., Europe and Japan continue their record efforts to increase money supplies, powerful stimuli to world financial markets.
The U.S. economy, while far from a boom, seems healthier than at any stage since the recession ended four years ago. Jobs are being created; consumer spending and housing activities are rising, as are tax collections and corporate profits. Recent record highs in stock market averages are logical products of these results.
Despite fears of slipping back into recession, recovery has been uninterruoted but at a slow pace with only moderate hiring and new business investment. Economic growth is likely to remain around the 2% level without immediate signs of the breakout growth needed to stimulate employment, easing the burden on the Federal Reserve. For investors, the prospective economic environment will be continuing measured economic growth with low inflation. That is not ideal nor will it support job growth but it will be favorable to rising corporate earnings and for the stock market.
The tone of the market is definitely improving but memories of the financial crisis still leave stocks vulnerable to external shocks. Investors should continue to concentrate on big-cap stocks with rising earnings and resources that provide defenses against the unexpected.
Currents within the market show industrial stocks gaining more strongly with an improving business cycle, taking the places of consumer durables and other “defensive” stocks. Gold, a refuge in fearful times, continues its downtrend and should be avoided. The technology sector has been in the middle and seems to be ending its own correction.
Intel (INTC-$24) is a solid pick with a reasonable valuation and almost a 4% yield. Apple (AAPL-$456), now with a 3% yield is a natural. So is General Electric (GE-$22) with its 3.4% yield. All three can be expected to boost their dividends annually, making them excellent investments.
DuPont (DD-$55) is a classic cyclical stock with a fast growing agricultural chemical division and a 3.5% yield. Among the less familiar, Brookfield Infrastructure Partners (BIP-$37) continues its global growth in utilities, transport and energy. Current yield is 4.5%.
No column for two weeks as I will be in the Baltic area. Internet speeds are faster there than here and I would be delighted to hear from readers. Meanwhile, stick to quality and avoid anxious concentration on day-to-day fluctuations. Thoughtful balancing of risks against rewards continues to be profitable.
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/