20K Will Be Ok!
Dow 20,000 continues to hang just above our fingertips. As Cole Porter wrote,
My dear, I’ve a feeling you are
So near and yet so far
You appear like a radiant star
First so near then again so far
This dilemma confronts investors whenever a new round number record challenges the Dow Jones Industrial Average. Every golfer knows the challenge of round numbers like “breaking 100 [or 90 or 80]” and baseball fans honor the late Ted Williams, the last player to hit .400.
That was in 1941. Fortunately for investors, the Dow continued to set new records, up almost 20,000 since closing 1941 at 112. It popped through 500 in 1956, 1,000 in 1965, 5,000 in 1995 and 10,000 in 1999. In all probability, it will close above 20,000 either before 2016 rings out or sometime in 2017.
This record is sound evidence that higher closes are milestones of continuing progress, reflecting growth in the U.S. and global economies. There will always be fluctuations, dips and corrections; they are inherent in the nature of all markets. Unfortunately, the financial media exaggerate fluctuations, scaring many Americans away from the opportunities presented by sensible investing in stocks.
CNN reports that more American adults drink coffee daily than have money invested in the stock market. I hope that some of the 61% who have at least one cup of coffee daily would put the cost of a daily café latte into the market and join the 48% of Americans who have money in stocks. Time is on the side of stock investors.
The Dow much less accurately represents the overall market than the S&P 500, which weights 500 stocks by market cap. The Dow is an arithmetic average of 30 stocks, overweighting high priced stocks like Goldman Sachs (GS-$240), which has accounted for one-third of the Dow’s gain since the election. It is however, the most popular and has greater historic roots since its creation by Charles Dow in 1896.
General Electric (GE-$31) is the only component remaining from the original group in 1896. It has been a recent disappointment with its price up only 2% this year as it continues to reshape the company. Among our other portfolio laggards, Disney’s (DIS-$105) is flat for the year as its broadcasting assets lagged its parks and movies. Visa (V-$77) is also flat despite steadily rising earnings. Intel (INTC-$36) is up 7% but all three are still disappointing when compared with new buys like Nvidia (NVDA-$107), which is the top performer this year of all 500 stocks in the S&P 500 average.
One of the more difficult tasks in managing stock portfolios is the action to take with a stock whose price action disappoints in the face if decent fundamentals. Pfizer (PFE-$32) has strong fundamentals and an above-average dividend yield but its outlook has weakened on research setbacks, increasing competition and its decision to shelve its plans to spin-off its consumer lines.
I am selling our positions, replacing them with more timely stocks from the financial sector like Morgan Stanley (MS-$42) and JP Morgan Chase (JPM-$86) and with new buy Eli Lilly (LLY-$73). Lilly stock fell 6% last quarter while the S&P lost 1% before rebounding after the election.
Lilly sold off after its last earnings report, which missed estimates although the shortfall was attributable to increased research investment. It recently reported new product growth and increased is forecasts. Morgan Stanley upgraded its recommendation, noting that Lilly has a history of providing conservative guidance. The FDA has its new rheumatoid arthritis drug under review and Morgan Stanley feels approval is likely in January.
Ted Williams, the last .400 hitter, advised. “Wait for a good ball to hit.” He said, “Think. Don’t just swing.” Investors who follow this advice can reinforce my best wishes to them for a “Happy and Prosperous New Year!”
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
