The Madness Of Crowds
Stock market investors are eager buyers of forecasts for future stock market moves. I’m often asked what the market will do next. A few days ago, the polls were almost unanimous that Mrs. Clinton would win. She was the obvious choice for Wall Street, borne out in stronger markets in October, which then weakened when more e-mail news lifted Mr. Trump’s chances.
As we now know, none of this happened. First, Mrs. Clinton lost, a reminder to all that something that is practically a “sure thing” often isn’t. Second, the stock market had its best week since 2014 with the Dow Jones Industrials up 5% to a new all-time high. These events illustrate the two fallacies that underlie attempts to forecast stock market moves.
It is impossible to reliably predict future events. Probabilities can and should be assessed but should not be overdone, as recent events illustrate. Even if an investor is fortunate enough to anticipate news events, it is almost impossible to determine how the judgments of other investors will impact the market. As a legendary Wall Street figure used to say when asked what the market would do, he would reply, “It will fluctute.”
Even so, actual events and market behavior are invaluable signposts for investment success. The Labor Department reported that weekly applications for unemployment benefits fell last week to their lowest level in 43 years. Economic growth was only 1.1% in the first six months but increased to 2.9% in the July-September quarter. Retail sales and home construction are gaining strength and, predictably, inflation is finlly ticking up.
All this means that the probabilities are quite high that the Federal Reserve will increase interest rates at its December meeting. A year ago, it raised rates for the first time in ten years and markets are anticipating another bump with the 10-year Treasury bond yield already up to 2.3%.
Such Fed announcements sometimes tap the brakes on the market, however, today’s surprising post-election momentum may have legs. For the last two years, stocks have not made much progress and this “trading range” recalls the stagnant market during the slow growth period from 1968 to 1982. This all changed when President Reagan slashed taxes and encouraged deregulation, spurring a new bull market. That run continued until it overshot in 2000, regaining momentum since President Obama took office with the Dow Jones Industrial Average then at 7,949. It’s up 137% since his inauguration, slightly ahead of President Reagan.
Valuations today leave upside room. The S&P 500 stocks are trading at 17 times trailing 12-month earnings. The combination of resumed economic growth with proposed tax cuts and deregulation in President-elect Trump’s Admistration could boost corporate earnings, fueling another bull run.
Many companies, particularly banks, haven’t fully recovered from the Financial Crisis and the strength in bank stocks since the election holds promise for that sector. I am adding to our positions in JPMorgan Chase (JPM-$78) and Morgan Stanley (MS-$39). Technology stocks have also been strong with the exception of recent high fliers like Facebook and Netflix. Amazon (AMZN-$755) also slipped but a promising shoping season combined with its substantial Cloud storage business keeps it a buy.
Nvidia (NVDA-$93) is up 178% this year, climbing to the number three position in my portfolios, behind Apple (AAPL-$109) and Amgen (AMGN-$147). Such a run will inevitably lead to a price correction but the company’s skillful transition from a component supplier to a leader in platform solutions with accompanying superior earnings growth makes it an extraordinary standout in a very competitive sector.
Known for graphic cards for PC’s and video games, Nvidia is expanding into data centers, auto infotainment (Tesla), processors for self-driving cars and, significantly, providing the chips for Artificial Intelligence (AI). It recently announced partnerships with IBM, Microsoft, the National Cancer Institute, and the Department of Energy. Its P/E is a robust 47, supported by over 100% earnings growth expected this year. There’s even a 0.6% dividend yield with three straight yearly increases.
Stocks that stand out from the crowd help investors make decisions away from the emotions of the crowd overreactihg to news events. Cool discipline is not easy but it is rewarding.
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
