Taking Stock

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Tony Crowell
Tony Crowell

Riding Higher

All three major stock averages are competing for new headline highs. Both the broad-based S&P 500 and the Dow 30 closed at record highs within the past week. The financial media credited prospective Federal Reserve actions or, more accurately, lack of actions, when Chair Janet Yellen commented to Congress that any hike in interest rates would not come until later this year.

Investors like specifics, which is why brokerage firms helpfully create useless “price targets.” As the Fed Chair announced that the Fed will not raise interest rates “for the next couple of FOMC meetings.” This provided assurance for any investor equipped with a calendar, and seemed particularly encouraging to those who regard a couple of months as a long-term horizon.

The Fed forecast is for inflation to decline further in the near term before rising gradually over the medium term to 2 percent as employment builds and lower energy prices work into the overall economy. Current conditions suggest a possibly extended cushion of time, as the inflation rate in the U.S. in 2014 was 0.8 percent. Lower energy prices drove the rate down for January of 2015 to a negative 0.1 percent over the preceding period.

In Europe, finance ministers kicked the Greek financial crisis four months down the Pythian road, allowing Greece and its creditors a lifeline to renegotiate terms of its bailout program. The overall Eurozone should be more favorable by then. Political risk remains on the agenda but monetary growth and consumer confidence are again increasing, historic signals of faster economic growth.

Meanwhile, the U.S. stock markets have continued their leading pace. Year-to-date, the S&P 500 is currently ahead over two percent with stock accounts weighted toward larger quality growth stocks like Apple doing better. Oil stocks have stumbled, as have some well-known financial and utility stocks. The leading sectors so far are Health Care, Information Technology, Materials and some Consumer Discretionary stocks.

After several years of favorable market conditions, the inevitable shouting and ringing of bells that will accompany new market highs will chase some investors into selling. Certainly, overstaying any market is damaging to investment returns but such errors come from greed. As we reach new highs, some will be frightened into fearful selling for fear of losing their gains.

As I wrote here in 2009 and again in 2011, Bill Tilden, the great tennis player said, “Never change a winning game; always change a losing game.” Just as player winning a set from the back court should not decide to try rushing the net, stock players who have done quite well with larger blue chip stocks should not suddenly decide that coal or offshore drilling stocks are timely.

Remembering that psychology studies have found that investors place a greater premium on avoiding loss than on obtaining profits, investors would probably enhance their returns if they gave less attention to daily stock fluctuations and did something else. Gardening, golf, travel and spending time with friends should work. These diversions would probably be easier if investors did not give so much importance to the price they paid for any stock. This has zero bearing on the future price behavior of any stock. (I find earnings estimates and tracking changes from 90 and 200-day moving price averages more useful.)

As we reach new highs, valuations naturally become higher and investors should avoid the euphoria that sometimes weakens realism. My recommended strategy is to concentrate investments in high quality, growing companies. Size helps in volatile times. Examples are Apple (AAPL-$130), Amgen (AMGN-$158), Boeing (BA-$151), BlackRock (BLK-$374), Blackstone (BX-$38), Celgene (CELG-$123), Disney (DIS-$104), Ecolab (ECL-$116), FedEx (FDX-$174), Intel (INTC-$33), Morgan Stanley (JS-$36), Nike (NKE-$96), Novo-Nordisk (NVO-$47), Thermo Fisher (TMO-$130) and Visa (V-$273). Enjoy the ride!

 

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 1995. [email protected] 949.494.1376/800.697.2622

www.crowellroberts.com

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