The stock market illustrates the difference between climate and weather. Its climate is a prevailing moderate upward slope roughly in line with U.S. economic growth. Its weather is as variable as a New England winter with gusts from any direction, sporadic storms and a really big one every generation or so.
Market forecasting for the past few months focused on the prospects of Federal Reserve interest rate increases. With the Fed continuing to leave rates alone, at least for now, investors are looking elsewhere for signs. Should the economy pick up a bit, increasing growth data could well prompt Chair Janet Yellen and company to boost interest rates a quarter point in December. A rate increase at that point is already anticipated in financial markets, elevating the current political campaigns to the dominant predictor positions until Election Day.
Wall Street price action responds more warmly to the prospects of Secretary Clinton as a return of the incumbent Presidential party has historically boosted the stock market. Regardless of the merits of either candidate, uncertainties always plague the market and Mr. Trump’s positions are regarded as less certain by most of the investment community. Before the first debate Monday, when opinion polls had slid in his direction, stock market futures for Tuesday’s opening were down. After the debate, futures swung to the upside and the market rallied sharply the following day.
It then dipped on Thursday as an upward revision to second quarter GDP growth revived worries about Fed action. Deutsche Bank, Germany’s biggest, facing a potential $14 billion fine, set off additional worries about another banking crisis. That’s unlikely but tensions and reactions reflect extended investor concerns in a sector still badly scarred.
The 90-minute debate produced what seems like more than 90 hours of comment; this will probably build as we approach the next debate on October 9. That will take us to 30 days before the election, compressing the period of suspense and doubtlessly heightening investor worries of various uncertainties.
As usual, I feel readers should worry less about unknown outcomes and concentrate on the actions to take now. Goldman Sachs likened the debate to a heavyweight boxing matchup and cautioned that uncertainties may increase over the nest few weeks. It recommended stocks in companies with substantial government sales, like defense contractors and providers of construction materials in anticipation of increased funding for infrastructure, a possible area of agreement among the candidates.
Vulcan Materials (VMC-$115), a provider of construction aggregates, asphalt and ready-mix concrete is a new buy recommendation. The Alabama-based company has delivered double-digit earnings growth in recent years and analysts expect this to continue. Estimates for the year are $3.39 a share, rising to $4.69 next year.
That’s a P/E of 33, easing to 24 next year, a bit pricey but still a timely pick with a solid foundation. Yield is 0.7% with increases on a dividend doubled earlier this year. Nucor (NUE-$49), a highly regarded steel company, is also a buy. Analysts are raising earnings estimates that are now $2.71 for his year, up from $1.77. A nice complement to Vulcan, its P/E is lower and its yield of 3.0% is higher.
Health care stocks have been shaky on concerns that their drug prices will be pressured. Novo-Nordisk (NVO-$41), the leading maker of treatments for diabetes and related obesity, announced job cuts and its price dipped to its lowest valuation in recent years. It’s an increasingly attractive buy although drug prices are an attractive political target and buys should be deferred until after the election.
Despite pressure on this sector, Amgen (AMGN-$165) is reporting progress on new drugs, steady growth and a P/E of only 14, quite low for its record and prospects. Bristol-Myers (BMY-$53) was banged up when expanded uses of one of its drugs was denied. These two yield almost 3% and are quality positions. Strong blue chips are excellent to ride out election turbulence. Apple (AAPL-$112), Danaher (DHR-$77), General Electric (GE-$29), Intel (INTC-$37) will be rewarding investors long after the political winds blow out.
No column for two weeks while on vacation in Eastern Europe.
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