Taking Stock

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Tony Crowell
Tony Crowell

Where Will The Market Go?

Investors and investment media spend enormous energies in asking and trying to answer where the stock market is headed. An elevator operator taking J.P. Morgan up to his office asked him. Mr. Morgan replied with his usual succinct accuracy, “It will fluctuate, young man, it will fluctuate.”

Investors should never forget this inherent nature of markets even though the recent summer lull might have induced complacency. Until last week, stocks managed a 51-trading day streak without a decline of 1% until they tumbled 2.5% last Friday, the worst drop since Britain voted in June to leave the European Union. They rebounded 1.5% the following Monday before regaining their breath. Morgan was right.

Although the financial media blame the Federal Reserve for almost every market move, investor “sentiment” was probably more responsible. After the “Brexit” vote, investors braced themselves for a collapse and investor pessimism was extreme. Such emotional extremes usually foretell moves in the opposite direction and relieved traders popped up from their foxholes ready to buy.

These fluctuations are typical of many short-term stock movements that reflect reactions to financial media and stock analyst “estimates” or “expectations.” Children presenting parents with a report card that contains a single disappointing grade are familiar with these reactions.

The latest economic data was weak, thus boosting stocks as traders concluded that a September interest rate hike was increasingly unlikely. Retail sales and industrial production both dipped in August. Combined with the stock market drop last week, this heartened traders and stocks went up.

Recent price action in Apple (AAPL-$115) is also illustrative. Its stock slipped from $108 to $103 as a small army of publicity-seeking financial operatives found its new iPhone models disappointing. The public disagreed and a crush of new orders for the iPhone 7 drove its shares up 10% to a nine-month high. It is now within hailing distance of tis all-time high of just over $132.

Although much financial media consumes itself with conflicting jabberwocky of future stock moves, investors should continually remind themselves that short-term stock market fluctuations usually are reactions to investor emotions. The keys are the actions to take and thoughtful assembly of portfolios of quality growth stocks will outperform trying to adapt to the winds of fortunetellers.

Apple publishes its next earnings on October 25. Its guidance for the next quarter may anticipate a strong holiday season. Other tailwinds will come from Samsung’s problems with its Galaxy Note 7 as well as new features in the Apple Watch 2 and lower prices on the Series 1.

Investor skepticism presents another opportunity in Monsanto (MON-$104). After several rounds of sparring, Bayer AG finally persuaded Monsanto to accept $128 per share in cash. This is a $66 billon takeover, easily the biggest this year. Closing will require numerous regulatory approvals, thus the long closing timeline with Bayer expecting the deal to close by the end of 2017.

Assuming a close in December of 2017, the annualized return including Monsanto’s $.54 dividends would be 15%-17%. A $3 billion breakup fee payable to Monsanto if the antitrust concerns kill the deal is an attractive cushion and so are the prospects of improvements in Monsanto’s cyclical seed businesses. There will be price wobbles as the parties navigate through sundry regulatory agencies, however, the fixed cash buyout price provides insulation against general market fluctuations.

The media, brokers and funds encourage investor to play stock prices against the predictions of financial critics. Looking through their clouds of such predictions toward prospective actual results is difficult but rewarding. I am encouraged by a poem by the matador Domingo Ortega, a favorite of President Kennedy:

 

Bullfight critics, row on row,

Fill the enormous Plaza de Toros;

But only one is there who knows,

And he is the one who fights the bull.

 

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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