As we near the end of the third quarter, stocks are up 6% for the quarter and 15% for the first nine months of the year. These returns are of the S&P 500 stock index, which is running a bit ahead of the popular Dow Jones Industrials Average. The S&P includes Apple and the DJIA does not, although it will probably add it, replacing a less representative stock like Alcoa.
Those are good returns but immediately raise the question of what we can expect in the coming quarter. The stock market tends to observe Newton’s first law of motion in continuing its state of motion until an external force is applied. The supporting forces by the Federal Reserve and of a grudgingly improving economy are likely to continue its present trend although a collapse in the long playing attempts to rescue the Euro would be a setback.
Consumer confidence is inching up and is spilling over into the stock market although overall valuations remain moderated. Resolution of the uncertainties of the November elections will provide a climate later this year that will favor a traditional year-end rally. Despite all the daily worries, I still expect that December will bring more optimistic predictions of possible new highs in the market averages. A 5% gain in the Dow from its present level would do it.
That might seem like a signal to flee the market to many retail investors, who have been shoveling their money into bonds ever since financial crisis took hold in 2008. Fidelity, one of the biggest mutual fund operators, announced that nervous investors now have more than half of their $1.6 trillion in bonds and money market funds.
The trend of these retail investors always to be late to the party is one of the oldest established traits of the stock market. Despite the solid gains in the market since the financial crisis, those trying days seemed to have left them with costly scars. Certainly, these have been trying years in stocks but the many clouds of apparent worries are blocking their view of a reasonably valued market of stocks with rising earnings and dividends.
Many soft spots persist in heavy industry and high-end retail while energy prices continue their usual zigzag courses. The best strategy to continue to stay ahead of the market is to emphasize larger companies that are putting solid growth numbers on the board and displaying the capabilities to keep this up.
Apple leads the parade but there are others keeping step like Abbott Labs (ABT-$69), Aflac (AFL-$47), Broadcom (BRCM-$35), Bristol-Myers (BMY-$33), DuPont (DD-$50), General Electric (GE-$22), IBM (IBM-$205), Intel (INTC-$23), Novo-Nordisk (NV)-$157), Syngenta (SYT-$74), TJX (TJX-$45) and US Bank (USB-$34).
I sold my remaining positions in Michael Kors (KORS-$53), the fast growing apparel company. Its valuation grew even faster and the company seems to be shifting from style toward fashion, an important and easily lost distinction.
My newest buy recommendation is Amgen (AMGN-$84), the well known large biotech medical company. For many years, its progress seemed stagnated, perhaps slowed by overreliance on its first two big drugs. Sales are now gaining momentum and earnings following with September earnings forecast up a modest 3%, accelerating to 18% growth for the December quarter and full year.
The company sat out the dance for ten years with a flat stock price but is now moving to new highs. New drug announcements are encouraging as are its dividends. These began a year ago and were increased in February, offering a present yield of 1.7%.
Consumer spending, dampened by the housing collapse, is looking better. This could spill over into a solid holiday season, boosting the chances for a return to the stock market’s traditional year-end rally. Rising earnings and dividends will help stuff holiday stockings.
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/