Over 20K; What’s Next
Two events: Dow 20,000; President Trump. The first had been anticipated for over a year; the second was a surprise. There is little question that they are now linked, yielding both questions and guidance for investors.
After the election, stocks woke up to the first decent rally in a couple of years. Led by the blue chip Dow Jones Industrial Average, which fell a hair short in early January, it crossed 20,000 on January 26, a record level. This brought on much media attention that demands some analysis.
For one thing, the DJIA is undoubtedly the popular star for financial headlines although its method of computation over weights the stock prices rather than the market caps of its components. A few names like Caterpillar (CAT-$96) and JPMorgan Chase (JPM-$86) accounted for much of the recent surge despite laggards like Nike (NKE-$53) and Verizon (VZ-$49).
The more representative S&P 500 and the Nasdaq are also flirting with new highs, with increasingly louder signaling not only in financial media but also in general-interest and social media. While some hope that this may induce wider participation in the stock market, Dow 20,000 is unlikely to ease the general popular mistrust of financial institutions. This became more acute after the global Financial Crisis in 2008, leaving many feeling that financial markets are “rigged” by insiders.
There also remain unsettled and uncertain feelings after several years of mediocre economic growth. The Dow’s ability to rise above these clouds was grounded in pro-growth policy announcements by President Trump and by the hope that a less-dysfunctional Congress will provide constructive action on these proposals.
Stock prices move in anticipation of future developments. Positive business catalysts like increased spending for infrastructure will probably take several months to work their way through Congress. It was so shamefully obsessed with blocking the proposals of President Obama that it may need retraining to revive its economic governance responsibilities. Its members are highly attuned to public criticism that may stir them into action.
The media will doubtlessly promote various sectors and stocks, guessing at those likely to be favored by government action. Investors have an opportunity to wait for the cards to be dealt before anticipating potential beneficiaries.
In general terms, the odds have improved. For one thing, the country should be spared the annual partisan battle on raising the federal debt ceiling. This is essentially an accounting issue stemming from authorizing Liberty Bond sales in 1917 that had been routinely approved until Congressional squabbling in recent years led to shutdowns of the federal government, aggravated in 2011 by actions leading to downgrade of the nation’s bond credit rating.
Companies are currently reporting earnings for the last quarter of 2016. Results are generally favorable and their forecasts indicate further strength in the second half of the year. Economic conditions in Europe seem to have bottomed out, providing an improving environment for many companies.
Pending specific funding for new policies, investors should concentrate on stocks with broad bases for continued growth. Disney (DIS-$108) is an excellent example. Its stock price dipped in 2016 on concerns that its broadcast activities were weakening but its stock is now at new highs on further review of its many strengths. In films alone, the next few months will be flat but fiscal 2018 (beginning this October) will bring four Marvel films, two Star Wars films and three animated family films.
General Motors (GM-$37) and Magna (MGA-$43) are sound values on improving auto sales. Visa (V-$83) is ringing up earnings growth at 15% rates as both credit and debit card payment volumes accelerate. Apple (AAPL-$121) stock is breaking out in a resumed uptrend. Next earnings date is January 31.
In a speech in Cape Town in June 1966, the late Robert Kennedy said:
There is a Chinese curse, which says ‘May he live in interesting times.’ Like it or not we live in interesting times. They are times of danger and uncertainty; but they are also more open to the creative energy of men than any other time in history.
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
