Taking Stock

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By Tony Crowell
By Tony Crowell

The Word From Wyoming

 

This week, Jackson Hole is the center for stock market prediction. Federal Reserve Chair Janet Yellen will address a well-heeled money crowd. They will be straining in their seats to hear some indications of when the Federal Reserve will add another quarter-point to its benchmark interest rates. Ms. Yellen and Chairman Bernanke before her have guided U.S. central bank policies during the stock market’s climb over the last seven years. It is unlikely that she would use a speech to rattle Wall Street nerves, especially just before the last week before the Labor Day weekend.

It is curious that large stock market swings are based on indications of a single interest rate indicator. It’s somewhat like taking directions from a weathervane. Certainly, low interest rates benefit many companies and their investors but there are other factors like company earnings with more direct impact.

Corporate earnings have recently provided more promise than actual results. The past four quarters showed declining rates of growth although much of this is due to the lagging oil and gas sector. With those removed, the next quarterly earnings reports that will begin in October will probably reflect an overall return to positive growth.

There are some encouraging signs like the latest report on “durable goods,” which includes industrial machinery, rebounded strongly in July. Business capital investment has been tepid and rising orders in this category would signal a long-delayed rebound. The housing market is also strengthening, including needed gains in the lower and middle price ranges.

The unemployment rate remains low. With mortgage rates also low and wage growth finally returning, housing demand will increase. The Federal Reserve’s statutory obligations include seeking “full employment” and it seems doubtful that Mrs. Yellen will send any signals that might jeopardize job recoveries.

The Federal Reserve’s next interest rate meeting is in September with two more in November and December. September has been a weak month historically for stocks with average gains building in the last three months of the year. Should the economy finally begin to show more solid growth, an interest rate increase might come toward the end of the year with modest but steady growth in the interim.

For stock investors, the market will probably continue its summer pattern of fluctuating up and down in almost equal measure. The last 15 times the S&P 500 had a down day, it was up the next day 13 times. The Nasdaq Composite average went 38 days without posting back-to-back down days. Without some outside catalyst such as an unexpected Fed announcement, this trendless trend is likely to continue.

This is frustrating for many, whose patience is further tried by the marketing efforts of investment firms and stock advice to take action. Investors should take these slack times to review what they own, perhaps deferring buy or sell decisions until the next earnings announcements. Jesse Livermore, a famous stock speculator, said “It never was my thinking that made the big money for me. It was always my sitting. Got that? My sitting tight!”

The “sitting” comes easier when cushioned on a portfolio of selected large company stocks with dividend growth. Pfizer (PFE-$34) made the news with a $14 billion purchase of cancer drugmaker Medivation. This will strengthen Pfizer’s oncology lines and provide an earnings bridge as its patents expire on Viagra and other drugs. This should benefit earnings in 2017, which are not estimated at $2.71 a share, up from an estimated $2.46 in 2016. Its stock yields 3.4%, high by current measures, with dividend increases for the past five years.

Real Estate Investment Trusts (REIT’s) will be elevated from the Finance Sector to a new Real Estate Sector, becoming the eleventh Headline Sector under a global stock classification (GICS). This will raise the prominence of these often overlooked securities.

Simon Property Group (SPG-$215) is our largest REIT position. I am adding a new buy, STORE Capital (STOR-$29), a Scottsdale-based REIT focused on single-tenant properties including over 1,500 chain restaurants, supermarkets, drugstores and other retail and service properties. It went public two years ago and currently yields 3.6% with one increase already.

The current political campaigns could rattle anyone’s nerves. Investors should remember that these will cease on November 8 and the world’s largest economy will still be here with attractive stock investments throughout ‘the home of the brave.’

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

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