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Taking Stock

Tony Crowell

Tony Crowell

The Santa Claus Rally

Santa Claus brought early gifts to stock investors when Chairman Bernanke’s farewell report on Federal Reserve policy announced a very gentle program of reducing its program of buying bonds. The Fed even added a sweetener by extending the period before it will begin to act to tighten short-term interest rates. Stocks moved up to record levels on recognition that easy monetary policies intended to support the current economic recovery will remain in place for at least the next two or three years.

An approaching New Year often prompts finance commentators into predictions for the coming year. This practice is more customary than useful as their market forecasts usually clump around a ten percent return, not far from the market’s historic results. Such predictions were blown out of the water in 2013 as both the Dow Jones Industrial Average and the S&P 500 rose to record highs.

This momentum continues currently, aided by the traditional yearend or Santa Claus rally. Guessing at future returns makes little sense to me, a game I leave to those doing it with visions of media attention dancing through their heads. I prefer to focus on actions and continue to recommend that investors emphasize stocks of larger, well financed companies with sensibly reasoned prospects for future growth.

There is a seasonal tactic using stocks in companies whose prices have lagged despite decent results. These often attract tax selling as the year draws to a close, sometimes forming bases for rebounds, at least in the short-term. American Vanguard (AVD-$23), a maker of agricultural chemicals, is off 24% this year as weather-related issues impacted its sales and earnings.

These weaknesses followed two years of strong growth and its stock seems to be bottoming out. Any company that sells to farmers is subject to weather swings but AVD’s stock looks oversold at this time. This is also true of Deere (DE-$91) down 2% for the year on flat results. Both stocks are reasonably valued and have increased their dividends this year.

Bonds bombed in 2013. These allegedly “safe” investments took it on the chin on the mere suggestion that their holiday of ever-lower interest rates might end. Newport Beach-based Pimco began the year managing the world’s largest mutual fund, its “Total Return Fund.” Despite numerous public relations efforts by its co-CIO William Gross, it lost that title in November and its investors lost two percent so far this year.

It could have been worse. Investors in gold seem to believe that it is a “safe” haven from disasters. In 2013, the national debt went through $17 trillion, Congress shut down the government and almost caused a financial earthquake by taking us to the brink of default on Government bonds while Detroit filed history’s largest municipal default. Gold? It lost 26%.

U.S. stocks continue to be propelled by a more rapidly growing economy. Both Japan and Europe are also picking up speed. After a generation of financial torpor, Japan is rising again with its stock market up 50%. German continues to lead the Euro Zone and Allianz (AZSEY-$17), its very large insurance company, is worth considering. It owns Pimco and I would not be surprised if it spun it off.

Stock markets tend to continue their momentum until they overshoot at extremes or encounter an Unexpected Event. Valuations are higher than last year but not unreasonably so and stocks should continue to be rewarding.

The increased window for low rates seems to be providing a bottom for limited duration bond funds. The bond portfolio of MFS InterMarket Income Trust (CMK-$8) has a duration of 4.5 years and yields a little over 5% in monthly dividends. It’s another good place for some of the gifts that Santa is bringing us.

An even better place is to share some of our rewards from investing with those who are in need. That will always pay the highest dividends.

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/

800.697.2622 www.crowellroberts.com

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