Where To Focus?
Daily political storms appear so far to be confined to Washington. And have not (as yet) deranged stock prices. Should these turmoils spread to Wall Street, they could interrupt the stock market’s current uptrend. The market’s buoyance in the midst of a sea of troubles is an important signal of its continuing momentum.
Several recent financial developments boost this trend and investors should be alert to any reversals. Winners among the more volatile Nasdaq lead losers by over 200 issues and its large tech sector has regained an uptrend.
Higher interest rates are a perennial problem and Federal Reserve Chairman Powell’s recent testimony soothed many concerns. Mr. Powell told Congress that strong economic growth and stable inflation should keep the Fed on course to gradually raise interest rates. This translates to a probable pair of rate boosts this year. That would equal a fed funds rate of 2.25%-2.50%, still low by historical standards.
Financial stocks, weak recently, got their wind back on excellent earnings and rallied nicely. JP Morgan Chase (JPM-$110) and Bank of America (BAC-$29) are best of breed. Both are taking market share from Wells Fargo, are quite reasonably valued and will be announcing dividend increases.
Stocks in leading sectors are pulling ahead. The strongest currently are software, medical, business services, consumer and retail. Amazon (AMZN-$1,820) straddles these sectors and is a buy as it heads toward a $1 trillion market capitalization. Apple (AAPL-$192) will probably get there first. Amazon reports earnings on July 26 with Apple following on July 31. I suggest adding to positions in both in advance of their reports.
Forty-eight companies in the 500 companies in the S&P 500 have reported their quarterly results and overall earnings were up 25.3 percent on a 10.1 percent sales increase. More important, their guidance for future quarters is quite strong. Analysts believe that these early results may lead to record growth for the second quarter with further growth continuing into the third quarter and possibly onto 2019.
The current growth is partially attributable to tax cuts. Without these benefits, the rate of earnings growth will slow although we can expect peak earnings this year.
Unfortunately, the tax cuts have not “trickled down” to wages, which remain stuck. The unemployment rate edged up slightly in June to 4.0%, still the lowest since 2000 when wage growth was 4.3% rather than today’s 2.6%. This discrepancy will (and should) become an election issue as we approach the mid-terms, now only a little more than three months away.
Among our stocks, Danaher (DHR-$103) surged over 4% to an all-time high after reporting record earnings and a spinoff of its dental business later this year. Danaher provides science and technology products and services worldwide. Besides its dental business, the company addresses environmental issues, chronic diseases and diagnostic business lines for healthcare.
Earnings estimates for the year are currently around $4.40 per share, up from $4.03. The spinoff will be to a newly created public company. In most cases, these divisions into two focused units result in the sum of their stock prices exceeding that of the prior company. Danaher is a solid buy on solid earnings.
Thermo Fisher Scientific (TMO-$216) is similar in providing advanced equipment and services to medical and pharmaceutical companies as well as to agricultural, chemical and food service companies. It reports earnings July 25 that should be around $2.62 for the quarter, up from $2.30 and buys prior to the earnings release look timely.
Investors should focus on significant news amid all the current storm and fury. That’s not easy but it’s more rewarding.
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