Down, Up And Sideways
Stocks finally snapped a six-day losing streak with a 619-point rally on Wednesday. That’s a start but the market still needs to reestablish a firm footing if we will see positive returns for 2015. Stocks then extended their one-day rally with a three hundred-point follow-up. That still leaves them (as measured by the S&P 500) down 4% for the year.
They’re still up 85% for the five years since August 2010, a compelling reminder of the benefits of stocks as longer-term investments rather than short-term speculations. A two-day rally is hardly sufficient to reestablish an uptrend although its widespread vigor is encouraging. We can expect turbulence until September 17, the next scheduled news conference by Chairwoman Janet Yellen following the Federal Open Market Committee meeting.
The last Fed rate increase, which came after a streak of decreases, came in June 2004. It was followed by sixteen increases among attempts to cool the housing market. After that bubble finally burst, under new Chairman Bernanke the Fed began a series of cuts that took the fed funds rate almost to zero. The U.S. economy is strengthening, giving the Fed room to return to what it call “normalization” of rates although its New York Bank President commented that overseas events, particularly in China, have made an increase “less compelling” at this time.
The Fed is on record as looking to this year as the time when they could boost short-term rates off the nearly zero levels first seen in 2008. If not this September, the next scheduled opportunities are in October and in March of 2016. Timing the inevitable Fed action has given the media even more material than speculating whom Mr. Trump will next offend.
Prince Hamlet said, “If it be not now, yet it will come–the readiness is all.” Our readiness today requires avoiding stocks in companies like utilities and most REIT’s that higher interest rates will impact while weighting portfolios toward solidly capitalized growth stocks. After an initial rate increase, interest rates will still be near historical lows, giving room for superior growth rates in earnings and dividends.
These tactics worked well in the recent financial shocks from China that exposed the vulnerabilities of its artificially overheated economy and markets. Government controlled economies have a rotten record and its recent omissions of shortfalls may be only the beginning. Wealthy Chinese are estimated to make up a third of global high-end sales, thus prospects are fading for retailers like Tiffany, Coach and Swatch.
China is cutting back on imports of materials, further reducing the outlook for oil prices. Energy stocks are not timely. Neither are most bank stocks, still struggling with the aftermath of the financial crisis, and now confronted with overseas issues.
The Chinese devaluation signaled a significant warning as declines in the world’s second largest economy have global ripple effects. Stock selection now needs to consider the “China factor,” which was recognized by Apple CEO Tim Cook who phoned a CNBC commentator with assurances that iPhone sales to China remain strong. Apple (AAPL-$112) remains an unusual value for a company with its strengths. It’s ideal for retirement accounts using dividend reinvestment programs.
While times will remain uncertain, the U.S. stock market will benefit from its preeminence as a well-regulated roster of relatively proven companies. Valuations are still robust, although well below record levels, and investors should consider careful additions of the more successful. Amazon still seems to be something of a cult stock and its firing of engineers from its research lab is indicative of fading growth.
Google (GOOGL-$661) bounced off the $600 level and estimates forecast steadier earnings progress with a P/E of 22, acceptable on projected 15% growth. It trades also as GOOG-$630 with the higher price attributable to voting rights. New stock issued to employees will be non-voting and I expect the differential to continue to widen.
Others to consider now among larger companies include BlackRock (BLK-$314), Boeing (BA-$131), Disney (DIS-$102) and FedEx (FDX-$153). Each is off at least 20% from its 52-week high despite growing earnings. I still feel stocks capable of turning in positive returns for the year but investors should tune for growth and staying power.
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