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Taking Stock

Tony Crowell

Tony Crowell

The January Barometer

Stocks stumbled in January. As the month ends, the S&P 500 average is down 3%. The “January Barometer,” which holds that as January goes, so goes the full year, would be worrisome if the correlation of this “indicator” with actual market performance were not so mediocre. The correlation is strongest for September, if you can wait that long.

After a strong quarter with the S&P up 10%, capping a 30% return for the full year, a pause for breath is not unprecedented. Going further into 2014, I expect the momentum that drove stocks last year to new highs to lose some energy. The Federal Reserve has begun reducing is cash infusions into financial assets. That was a steady support for stocks last year and its “taper” is spooking some stock traders.

Those who rode the surge last year without much attention to fundamentals or valuations did all right. The recent dip is to me a clear signal that these traditional signposts for investing are resuming their usual primacy. Two weeks ago, I wrote, “It is an appropriate time to upgrade toward larger, strongly financed companies, perhaps moderating growth targets.”

This strategy continues. As the market looks for footing, solid blue chips are finding buying support, particularly those buoyed by timely favorable earnings reports. These include DuPont (DD-$61), Qualcomm (QCOM-$73), Roche (RHHBY-$69) and Union Pacific (UNP-$176). Steady growth is steadying the stock prices of companies like Ecolab (ECL-$100) and Coca-Cola Enterprises (CCE-$43), Coke’s bottler for Europe.

Apple (AAPL-$500) again dominated financial news. It reported solid growth in both sales and earnings and sold more iPhones and iPads than ever, but its stock price dived 8%. Apparently, selling a record 51 million iPhones in one quarter failed to meet the expectations of its critics.

Jan Sibelius, whose seven magnificent symphonies puzzled critics, had the right approach. “Pay no attention to what critics say. No statue has ever been put up to a critic.” Apple management seems to agree as it guided future earnings with its usual conservative restraint. Its stock is a buy.

Emerging markets were blamed for some recent stock weakness. This probably reflects stock market fads and fashions rather than fundamentals. Part of the enthusiasm for their boom was propped up by the coinage of the term “BRICs” for the fast growing economies of Brazil, Russia, India and China. Their performances varied and the newest expression is the “Fragile Five” for Turkey, Brazil, India, South Africa and Indonesia.

Market moves usually overshoot in both directions. Emerging markets are not favored now and investors should emphasize the U.S. and stronger economies in Europe. Pending resumption of a strong uptrend, reserves can be parked in Pimco’s 0-5 year High Yield Corporate ETF ($106). Current yield is 4.3%, portfolio duration 2 years.

Overall, interest rates and inflation remain low and stock valuations are not excessive. The economy grew at a 3.2% rate in the fourth quarter despite a partial government shutdown and continuing budget battles. This is somewhat encouraging but we could be in for enduring stagnation from the cowards in Congress who fear losing their comfortable benefits if they fund public works or other economic stimulus measures.

Unemployment is far from the 20% levels of the 1930’s but today’s 6.7% rate could be much better. While corporate profits have climbed to record levels, the share of men and women employed today is essentially the same as four years ago. Long overdue infrastructure investments could be a huge boost. Today, there are around 1.5 million less jobs in construction than before the financial crisis. There are plenty of unemployed workers who know how to build things but whom the private sector is unlikely to hire.

Government investment in public works prompts threats of bumbling bureaucracy but the record of the Roosevelt Administration’s WPA is not so bad. Besides giving jobs and hope to millions, it created a half million highway miles, 100,000 bridges and as many public buildings. With the government’s borrowing costs so low, it wouldn’t even be very expensive and would be a good investment in the economy.

The alternative is today’s cramped progress and the accompanying danger of slipping back into economic stagnation. Bipartisan cooperation would be needed; that ultimately depends on us, the voters.

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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