Taking Stock

Tony Crowell
Tony Crowell

Sailing Choppy Seas

The stock market’s frustrating search for a bottom seems inconsistent with economic realities. The market is a leading indicator, which might raise concerns that it is predicting a forthcoming recession were not actual economic indicators forecasting the opposite. Plunging oil prices dampened U.S. economic growth in the last quarter of 2015 but employment growth actually accelerated. Permits to build single-family homes also increased in December. Despite anxieties about stocks, consumer sentiment rose this month and consumer spending will get a boost as gas prices slowly work downward.

The impact in the U.S. of China’s slowdown has been exaggerated. Its growth did fall last year to a 25-year low of 6.9%, but this is the rate its government has long targeted. Moreover, December imports and export data suggest that its economy is stabilizing.

The collapse of oil prices hammered oil producing nations and companies, however, this is not due to sagging global demand but from a glut of supply. This will grow as Iran oil exports surge.

An emerging possibility is that events in China and the U.S. are causing investors to lose confidence in their government economic policy makers. China’s leaders stumbled in efforts to stop the plunges in its stock market, then confused the world with devaluations of the yuan in both August and December. With their opaque policies, their public statements bring skepticism.

In contrast, the Federal Reserve is transparent and independent, however, Wall Street disagrees with its actions. Last month, it announced that rising employment showed the economy no longer needed the support of near-zero interest rates and began to raise rates with the stated intention of taking them through 2% in 2017. The favorable winds from their prior actions helped the economy and stocks to a strong recovery from a bitter recession; these are now headwinds as Wall Street reacts to the weakening of its beloved low interest rate environment.

The Fed’s latest announcement this week lifted no hearts. Although its business outlook was steady, it noted recent slowing growth and moderating consumption, leaving open the possibility of another rate hike in March. The possibility of higher interest rates threatens current stock valuations and I believe the uncertainties stemming from the Fed’s ambiguous policies may be more of a factor in today’s discouraging market action than the much-discussed issues that make up the headlines.

The market is not getting much help from the current crop of earnings announcements, most of which are not of Super Bowl caliber. Uncertain conditions may be with us for several weeks and I am buying some ProShares UltraShort SP500 (SDS-$23), an ETF that goes up when the S&P goes down (and vice versa), as a partial hedge.

The prospects of higher rates dim the attractions of non-dividend high fliers, while enhancing blue chip stocks with yields over 2% from companies that raise dividends. Apple (AAPL-$93) and Boeing (BA-$115) qualify, with their valuations enhanced following earning reports that fell short of “expectations,” slamming their stock prices. Their immediate growth may hiccup but their cash flow and market domination insure their success. Both, incidentally, have already booked orders in Iran.

BlackRock (BLK-$301) and Bristol-Myers (BMY-$61), both paying well over 2%, beat estimates on both sales and revenues but their stocks sold off for no apparent reason. Thermo Fisher (TMO-$131) and Total System Services (TSS-$38) were also buffeted despite beating estimates. As economist (and successful stock speculator) John Maynard Keynes famously commented, “The market can stay irrational longer than you can stay solvent.”

Current political debates make the world seem even more irrational but their turmoil will pass, as will the current market vapors. Patience pays, made easier with quality stocks whose dividends pay you for waiting.

Income always helps. Wells Fargo Multi-Sector Income (ERC-$10), a closed end fund with a current discount from asset value of 14%, is paying 10% monthly and has a duration of only five years, helpful if higher interest rates do break out.

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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