After The Inauguration
After the November elections, the stock market came out of the doldrums with a nice rally based on prospects of government policies oriented toward business interests. Despite much grumbling about the policies then in force, stocks almost tripled during the Obama Administration. Much of that was due to the economic recovery that followed the Financial Crisis or 2007-2008, which was supported by fiscal stimulus and interest rate cuts by the Federal Reserve.
Investor anticipations of the impact of new Administrations have often gone amiss. President Obama suffered the largest slump between the election and inauguration of almost 20% following his election in 2008 with President Roosevelt a close second at a 19% loss before his first term began in 1933. The next four years reversed both these downturns with the market gaining 149% during President Obama’s first term and tripling during President Roosevelt’s first term. In contrast, the record gain between election and inauguration was 13% following President Hoover’s election in 1928. This preceded a record 76% loss during his term.
It would be a mistake to take these post-inauguration reversals as trading signals; they reflected our two greatest economic downturns and their subsequent recoveries. What is significant is their mirroring of public emotions. President Hoover’s inauguration took place at the peak of the ebullient “Roaring Twenties,” just before Yale economist Irving Fisher announced that stocks had reached “a permanently high plateau” just before the 1929 crash.
The ensuing Depression plunged the nation into despair that was still at full ebb when President Roosevelt took office. The New Deal reforms including bank deposit insurance and Social Security stemmed the outgoing tide, giving hope to the nation and stability to its markets. The recovery from our Financial Crisis during the transition from the Bush to the Obama Administrations mirrored the return to global stability as the world banking system recovered, aided largely by cooperation among nations.
President Trump’s Administration will be judged on its promised abilities to cut taxes, reduce regulations and increased spending to boost the economy. With changes to the Affordable Care Act demanding attention, the pace of the reforms may be irregular. Some of the euphoria that followed the election has faded and more realistic expectations seem to have guided the stock market down recently.
Investors seem to have eased back to healthy skepticism and market action over the next few weeks will probably be dominated by earnings reports. Early reports are meeting or exceeding expectations and signs of a recovering economy support a favorable market over the next few months.
Improving market conditions will undoubtedly signal the Federal Reserve to resume interest rate increases. Rates are still at very low levels but higher mortgage rates may slow the housing industry. I feel the financial, manufacturing and tech sectors will continue their recent strength.
General Motors (GM-$37) is quite reasonably valued. Its all-electric Chevy Bolt, now available only in California and Oregon, begins distribution next month in Maryland, Massachusetts and Virginia with New York and New Jersey following in March. Its new earnings report is scheduled for February 7 and I expect a dividend increase.
Magna (MGA-$42) is a major Canadian manufacturer of major auto components. It operates globally and recently raised its 2017 outlook. Earnings estimates for this year are around $5.25 a share, up 10%. Dividend yield is 2.3% with increases for seven straight years.
Microchip (MCHP-$65), another new buy, is an established provider of semiconductors for various embedded applications. Sales exceed $2 billion and 2017 estimates call for $3.62 earnings per share, up from $2.68 last year. Remarkably for this sector, it has a current 2.2% dividend yield with increases for five years. It has recently won some significant auto supply contracts. Next earnings report due Feb 7 and I suggest new purchases before then.
In some respects, the current market resembles the initial months of President Regan’s first term. He inherited an economy in a serious recession and stocks sagged for two more years until increased government spending restarted the economy. Today, the economy is growing although a faster pace is desirable, interest rates are still low and unemployment continues to fall. Those are favorable conditions for an improving market although investors should not become overly euphoric pending the posting of some actual figures on the scoreboard.
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
