Taking Stock

By Tony Crowell
By Tony Crowell

Bottoms And Tops

Is the stock slump over? Maybe. The market made a remarkable upward reversal on Wednesday after disorganized selling took the Dow Jones Industrial Average down more than 500 points before buyers finally rushed in, sending the Dow up over 400 points. The next day, stocks wobbled back-and-forth before the opening bell, then began climbing steadily and are up 150 points, pushing against 16,000.

Typically, market “corrections” take a few weeks to bottom out, thus even an unusually strong reversal may be only a prelude to a good performance in the spring. Markets in China seem to be back under firm government control and oil prices may be nearing a bottom, although the reentry of Iran to world markets will increase the global glut of oil, adding downward price pressure.

Investors should always remember that stock market declines are to be expected, occurring about every two years on average, although investors should also remember that markets are never average in real time. The essence successful investing in stocks is a long-term perspective. From 1926 through 2015, stocks have averaged an annual return over 10%. $1,000 invested in 1926 would be over $5 million today.

That’s little comfort to investors who fear that the current downturn is a signal that we’re heading into a recession. Sometimes, a market dip does precede a recession as in 2007-2009; however, recessions develop from deteriorating fundamentals and market fluctuations primarily extremes developing from investors oscillating between greed and fear. As economist Paul Samuelson once quipped, “The stock market has called nine of the last five recessions.”

In my view, stocks are suffering from the collective malaise of the U.S. economy’s persisting inability to resume vibrant growth. For 2015, the rate of economic growth is expected to be 2.5%, about the same as the 2.4% rate in 2014. The unemployment rate fell below 5% for the first time in years and, at last, there are signs of wage growth.

The outlook for the economy is lukewarm, at the worst, and the current “correction” in stocks has marked down their prices to valuations reflecting an overall tepid outlook. Even though we don’t know when a sustained uptrend will resume, the current tactic is to hold onto strong stocks, adding to them as funds permit, perhaps by culling out laggards who announce disappointing forecasts during the current earnings season.

Dividend increases usually accompany favorable outlooks for companies. They indicate more than a passing regard for the interests of their shareholders as well as some degree of confidence in the future. We have an unusually long list of favorites who are announcing higher dividend payments.

They include Abbvie (ABBV-$58), Aetna (AET-$105), Aflac (AFL-$55), Amgen (AMGN-$152), Avago (acquiring Broadcom 2/1/16) (AVGO-$124), Acuity Brands (AYI-$196), Boeing (BA-$123), BlackRock (BLK-$289), Blackstone (BX-$24), Bristol-Myers (BMY-$63), CDW (CDW-$37), Costco (COST-$150), CVDS (CVS-$94), Disney (DIS-$94), Ecolab (ECL-$101), General Electric (GE-$28), Honeywell (HON-$96), Nordic American (NAT-$13), Nike (NKE-$60), Pfizer (PFE-$30), Starbucks (SBUX-$59), Simon Property (SPG-$182), TJX (TJX-$67), Visa (V-$71) and Verizon (VZ-$45).

Investors seeking apparent safety have been buying bonds, lowering their yields. A 5-year Treasury yields 1.4%, easily beaten by most of the stocks listed above. Their dividends will increase, the bond will not. Go figure.

Plunging oil prices are aggravating political instability in the oil producing nations and their neighbors. Defense stocks will see new contract awards and their shareholders increasing dividends. I like both Northrop Grumman (NOC-$181) and Huntington Ingalls (HII-$97).

As the global economy recovers, so will consumers worldwide, enhancing the outlook for Interpublic (IPG-$21), the fourth largest ad agency with $7.5 billion revenues and the best returns for shareholders. Next earnings due 2/12 with growth over 10% and a 2.3% dividend yield.

Even though the stock market’s future behavior is unknown now, well it always is, but that has not stood in the way of superior returns. The actions are clear-don’t give in to emotional selling; do buy good stocks. Use caution but keep going.

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


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