Eyes On The Targets
Investors who did not “sell in May and go away” are fortunate they disregarded that ancient Wall Street cliché. After a 1.2% gain on the S&P 500 in May, the S&P is up another 1% in the first week of June,
In contrast to the continuing political clamor in the media, this sustained uptrend may seem incongruous. Corporate earnings have always been the dominant data for basic stock market performance with investor emotions often directing short-term market directions. Quarterly earnings in the March quarter stepped up and forecasts for the current quarter are encouraging.
Since 2007 through the ensuing severe financial crisis, the S&P has averaged only a 5% annual gain, half its average return since 1928. Measuring recent progress against this provides some comfort that the market’s historical reversion to its mean averages still provides upside room.
The forthcoming Federal Reserve meeting next week, an event that has dropped from media attention amid all the political brouhaha, is quite likely to produce its second rate increase this year. That would take fed fund rates to around 1%, still historically low. Low rates continue the investment advantages of stocks, but Wall Street may be reminded of the Ghosts of Interest Rates Past.
June is historically a flat month for stocks, typically a prelude to a weak summer season. Strong earnings forecasts aided by a global economic recovery have boosted stocks with some concerns developing on valuation levels. The testimony of former FBI Director Comey was viewed with apprehension by some and with relief as it developed. The flurry of political news may pause for breath and a parallel lull in the stock market seems probable.
Rather than squander energy on guessing the stock market’s latest wiggles, I continue to urge selection of stocks in companies with a demonstrated ability to outperform. Like the children in Garrison Keillor’s Lake Woebegone, stocks in successful portfolios are all above average.
This requires following Alexander Pope’s admonition to “Be not the first by whom the new are tried, Nor yet the last to lay the old aside.” Apple (AAPL-$154), the world’s most profitable company, remains the largest position in my portfolios as well as a continuing buy recommendation.
In my column of March 25, 2016, I first recommended Nvidia (NVDA-$158), then selling for $34, noting that it was a global leader in several lines of semiconductors. Nvidia has been the market’s best-performing stock in the past year. It is now our second-largest position, just ahead of Amgen (AMGN ($162), Amazon (AMZN-$1,008), Broadcom (AVGO-$253) and Visa (V-$95). All these are buys.
With so much attention on tech and high-tech medical stocks, Visa should not be overlooked. This is the dominant firm in the international system of global payments. It is building an international network of so-called “token services” program that is building to serve forthcoming demand from an estimated 21 billion [!] of Internet-connected devices.
Meanwhile, as an illustration of the pitfalls in clinging to the familiar, oil stocks continue to follow oil prices down. These were once core positions in stock portfolios and will eventually become attractive values. Occidental Petroleum (OXY-$58) would be a good stock to keep in mind.
High-tech medical stocks are timelier. I am adding Edwards Lifesciences (EW-$117), the global leader in innovative products for structural heart disease. The company is located here in Irvine, California and supplies its advanced products in nearly 100 countries worldwide. Analysts recently raised estimates for earnings this year to levels to around $3.50, up from $2.89. Earnings, not political chatter, should be the focus for investors.
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
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