Stocks had a good month in November, the best since March. The rally that begin with the unexpected election results is so far only pausing occasionally. The three-month period from November through January historically records the best results of the year and it is quite possible that current momentum will continue into the traditional year-end strength.
Economic indicators have moved to the upside since summer and stocks are moving ahead of this pace. They seem motivated by factors that the economist John Maynard Keynes labeled “animal spirits.” These refer to the bouts of optimism that inspire spurts of increasing willingness to accept investment and business risks. Over the last two years, fears of losing gains have kept the stock market in a narrow trading range and recent price breakouts are both welcome and overdue.
Prospects of increasing spending and incentives for much needed infrastructure improvement are boosting materials and construction stock sectors. Reaffirmed buys include Acuity Brands (AYI-$250), Brookfield Infrastructure (BIP-$31) and Vulcan Materials (VMC-$124). Among smaller companies, Georgia-based Mueller Water Products (MWA-$13) has had a good run already but still has upside room with earnings growth this year and next in the 16%-20% range.
Increased spending will lift investor spirits and will also boost interest rates as it comes with the first whiffs of returning inflation. The Federal Reserve meeting on December 13-14 is almost unanimously believed to produce the first interest rate since last December. That one rattled complacent investors but the next should not be so surprising.
The prospects of higher rates depressed leveraged stock sectors like Real Estate Investment Trusts and are savaging the bond market. Fixed income investments, especially those with longer-term maturities, should be avoided until this sector stabilizes. BlackRock Limited Duration Income Trust (BLW-$15) provides monthly distributions over 6% with an effective portfolio duration of less than 4 years. It will fluctuate among the general interest rate hysteria but is an attractive buy.
Returning to a more traditional rate environment is finally providing strength to banking stocks. JP Morgan Chase (JPM-$81) and Morgan Stanley (MS-$42) are doing nicely and analysts are increasing their earnings estimates for this year and the next. Even faster growth is seen for Goldman Sachs (GDS-$224), which is quite reasonably valued.
Holiday retail sales spending exceeded forecasts with greater strength in online sales. Amazon (AMZN-$739) is redefining Black Friday with new deals coming as frequently as every five minutes through Dec. 22. Amazon Web Services, with more than a million users per month, will exceed $13 billion in 2016 sales, up from $8 billion last year. Its CEO, Jeff Bezos, said that Amazon was the fastest company to reach $100 billion in annual sales and AWS is going through $10 billion at a pace even faster than Amazon achieved that milestone. The stock is expensive by traditional measures but the company defies tradition and its stock is an aggressive buy.
The tech sector has resumed its traditional leadership. Nvidia (NVDA-$87) and Broadcom (AVGO-$96) are standouts and Intel (INTC-$33) is finally regaining double-digit earnings growth. Nvidia has expanded from its traditional lines of Graphics Processing Units into leading positions in microchips for Artificial Intelligence and autonomous autos. Remarkable companies often have remarkable founders like Nvidia’s CEO, Jen-Hsun Huang, whose family immigrated from Taiwan when he was 10.
Through language confusion, Huang was enrolled not in a prep school but a reform school in Kentucky where his roommate was an illiterate 17-year old with tattoos and knife scars. Huang taught him to read. Besides scrubbing toilets, he took up table tennis, making Sports Illustrated at age 14. The company he founded now has $5 billion sales, up 54% last quarter.
President Franklin Roosevelt said “Remember, remember always, that all of us, you and I especially, are descended from immigrants and revolutionists.”
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