The Nervous Bull Market
Well over a year after making new highs, stocks finally broke through to new closing records on both the Dow Jones Industrial Average and the S&P 500. The NASDAQ over-the-counter index pushed through 5,000 and needs less than 200 points to complete a record new high trifecta. It will also get there, probably sooner than today’s skeptical investors would believe possible.
The overall market surge is broad and supported by substantial volume, important technical factors. Should volume increase on the nevitable down days, that would indicate selling by big institutions. To the contrary, increasing volume is buttressing market gains with parallel strong buying in the bond markets, driving bond interest rates to record low levels.
These strengths come in the face of a variety of continuing uncertainties that would usually be sufficient to derail a more fragile market. To some extent, particularly in the bond markets, it results from flights of capital from European and Asian markets to the perceived relative safety of U.S. markets.
Higher prices with increasing resilience are bullish indicators yet met amateur investors are pulling money out, withdrawing money from their mutual fund shares at twice the levels from last year. Markets will always suffer shocks and aftershocks and the surprise vote in Britain knocked over five percent off the S&P 500 in two days. It then went on to new highs in two weeks.
Overreacting is a losing strategy. The markets stumbled at the first signs of rate increases in 2013 and with Eurozone problems with Greece last year and more recently with Italian banking issues but shook off these blips. Nervous selling never works. Not only must the timid time their sales but they then face the challenge of restoring their nerves in time to get back in, two decisions grounded on fears and thus unlikely to succeed.
Market history is encouraging when new highs on the S&P 500 follow a long dry spell. There have been 20 other times before this week when the S&P went more than a year without a new 52-week high. One year later after a new high, the index averaged 22% gains.
More immediately, corporate quarterly earnings season is upon us. Analysts expect profits to contract for a fifth straight quarter, hardly encouraging, but analysts have turned pessimistic, lowering the bar for some positive surprises.
Concentrating on companies with stronger earnings prospects is always helpful. Since the “Brexit” vote, I have added more AbbVie (ABBV-$63), Doctor Pepper Snapple (DPS-$96). Huntington Ingalls (HII-$172), ARMH Holdings (ARMH-$47), Lowe’s (LOW-$82), Verizon (VZ-$55), Waste Management (WM-$67) and Wells Fargo (WFC-$48).
Both Brookfield Renewable Partners (BEP-$30) and Brookfield Infrastructure Partners (BIP-$46) continue as buy recommendations. Their current yields are in the 4%-5% range with almost certain increases. Each is capably managed by Brookfield Asset Management (BAM-$35), a Toronto-based global asset management firm with over $240 billion of assets under management. BAM currently yields 1.5% with dividend increases for the past four years and has been growing earnings at over a 20% rate and I am recommending it as a new buy.
I am also initiating positions in Monsanto (MON-$103), the world’s largest provided of agricultural seeds. Lower prices for commodities and related chemicals have pressured the company’s earnings, prompting a takeover bid of $122 from Germany’s Bayer AG, a very large drug and chemical maker. Monsanto rejected the offer, prompting a raised bid from Bayer of $125 on Thursday. Bayer also offered a $1.5 billion “reverse antitrust break fee” to be paid if Monsanto agrees but the regulators block the takeover. The revised offer is close to the company’s 2008 high and I expect its shareholders will benefit as time goes by. A 2% dividend will help the waiting.
Bull markets usually end in wild bursts of greedy overconfidence, not the prevailing skepticism. Stock valuations are above their historic averages but still below those seen at market peaks. There are many uncertainties, as there always will be, but consumer spending, housing and other sectors of the U.S. economy are improving. Careful selection of stocks in well-managed, growing companies remains a successful strategy.
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/www.crowellroberts.com
