From Corrections To Jazz
The market’s uptrend momentum lost energy and the background news of anxieties about interest rates pushed it into a “correction.” This was to be expected after its strong run this year. This environment demands restrained buys and even some sells. As reported last week, I sold a few positions in order to take advantage of a possible dip.
This pause in the market’s rise this year hardly means that we are plunging back into the abyss. Since the beginning of the year, the S&P 500 stock average is up 14%. At this point, it’s ahead for both the First Quarter and the current Second Quarter, the first time stocks have managed that since 2007.
The U.S. economy continues to inspire more confidence. Retail sales were up 0.8% in May with broad-based strength in autos and parts, building materials and food sales. Rising house prices led to a new record in household wealth and lower jobless claims showed progress in the labor market.
The fears that sparked recent selling seemed to have their roots in concerns that the Federal Reserve will soon end its successful program of boosting the economy by asset purchases. That will, of course, eventually happen but the fears that prompted selling were, as usual, exaggerated.
More concern comes from overseas, particularly from Japan, where the Bank of Japan slowed its badly needed stimulus programs. That sent stocks down in Asia and Europe, eventually rippling into our markets. In comparison to these markets, U.S. stocks are becoming even more attractive in relative comparisons, thus more foreign capital is likely to flow into our markets.
Concerns will persist, particularly as financial commentators speculate as to when the Federal Reserve will scale back its stimulus program. The Fed has made it clear that it will continue buying bonds, thus keeping a lid on interest rates, until there are more definite signs of a sustained economic recovery. These will come, as will the eventual slowing of Fed support, but probably not until fall.
Until then, the market will probably trade within a range of a few hundred points, providing opportunities to tune portfolios by adding to stocks that can do well in an environment of approaching higher interest rates. That could be difficult for housing related stocks, reflecting another reason why I believe the Fed will not be hasty to abandon its support.
The technology sector usually does well amid higher rates due to its potentially high growth. Cisco Systems (CSCO-$24) is quite a different stock from its skyrocket days in 2000 when its P/E ratio was well over a hundred. Its P/E ratio is now 12 and it offers a 2.8% dividend yield. Through a decade of tumult, it retained its position as the leader in computer networking. Sales are $44 billion, growing at 5%, while earnings are increasing at 14%.
The big medical and biomedical stocks are doing well, among them Amgen (AMGN-$98), Bristol-Myers (BMY-$47) and Cooper (COO-$121). Abbott Labs (ABT-$36), a leading maker of medical equipment, continues to post steady increases in sales, earnings and dividend payments. Novo-Nordisk (NVO-$167), the Danish-based world leader in diabetes care is forecast to continue its earnings increases at around 15% per year. It is one of my ten largest positions and remains a buy recommendation.
A new buy, Jazz Pharmaceuticals (JAZZ-$69) is a biopharmaceutical company targeted at meeting perceived unmet medical needs. This focus has led to innovative products in narcolepsy, oncology, pain management and psychiatry. Earnings have been surprisingly steady for a company in this dynamic sector and are forecast to hit around $5.50 a share for 2013, up 25%, with a similar increase currently seen for 2014.
Dublin-based, there may be a bit of blarney in its name selection. The company likens the efforts of its team members to the individual musicians who make music together in order to create jazz music. Its stock will add some new riffs for most investors.
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/