Who’s Number One?
A recent Gallup poll reported that a significant majority of Americans believe that China has become the leading economic power in the world today. Although China overtook Japan last year to become number two, the United States economy is still over twice that of China. This mistaken belief seems based on an understandable dismay over US unemployment coupled with widespread publicity of China’s growth.
This misperception first appeared in the polls in 2009 following the outbreak of the financial crisis. It thus reflects the damage done not only to employment but also to real estate and stock prices. Stocks have recovered, real estate has not, and this persisting error reflects the continuing damage to investor confidence.
Such irrational reactions may account for the substantial withdrawals that investors made from stock mutual fund during the first quarter of this year despite the stock market having its best quarter since 2009. Damon Runyon said, “The race is not always to the swift nor the battle to the strong, but that’s the way to bet.” Reacting to market fluctuations and news events is not the way to bet.
Uncertainties today over the political drama, fiscal gaps and the unsettled situation in Europe may prompt memories of 2011, when the market went nowhere. These issues are certainly material but they are quite well publicized and already baked into today’s market levels. (If they didn’t exist, the Dow would probably be over 20,000 already.)
Last year, the market confronted both the potential for the government to default on its debt and the unknown implications of a downgrade of the Treasury’s AAA debt rating. One happened, the other didn’t and the downgrade to AA+ had no impact on the Treasury’s ability to borrow. Normally, a debt downgrade raises the interest costs of a borrower but widespread fears provoked a continuing wave of buying of U.S. government bonds, lowering its interest rates. Reality again differed from public perception.
Euro Zone financial issues remain unsolved but last year saw commitments by its sounder members to attempt cooperative resolution rather than abandon the weaker members. In this country, although the recovery is still weak, it is continuing and the U.S. economy is on stronger footings. Employment, manufacturing, auto sales, payrolls and even housing starts all show improvement. As the year continues, investors will become less frightened that we face another financial crisis although each new headline will probably produce sporadic fearful selling.
Interest rates continue to drop with the key 10-year Treasury down to 1.96%. Its rate was usually around 5% a few years ago and its all time low was 1.95% in December 1941. At some point, probably in a few months, the economic recovery will gain more traction with an accompanying rise in interest rates. Higher rates will mean lower bond prices and bonds, particularly long-term bonds, should be sold, and not bought.
Quality stocks tempered by the stresses of the last few years with rising sales and earnings should be bought. Thermo Fisher (TMO-$55) is a global provided of scientific equipment and services. Sales are over $12 billion and growing despite its academic and government customers deferring capital expenditures. Thermo’s first-quarter results exceeded expectations and it raised its earnings guidance for 2012 to $4.75 and Wall Street analysts forecast $5.30 next year.
That’s a reasonable valuation and there’s even a modest dividend. For those looking for income, a reader inquired about Windstream (WIN-$11) an Arkansas-based provider of Internet, phone and TV services to rural areas. Sales are substantial ($4 billion) but earnings have been irregular. Its main attraction is its .25 a share quarterly dividend, which it has paid since 2007 and is almost a 9% yield. Windstream has a lot of debt but low interest rates make that burden easier and I think it’s attractive enough to justify taking small positions.
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@example.com 949.494.1376/