Taking Stock

By Tony Crowell
By Tony Crowell

It Just Keeps Rolling

This old bull market just keeps rolling along. The current bull run celebrated its eighth birthday in March and is now the second longest since WWII. A bull market is conventionally defined as a rise uninterrupted by a 20% decline, which announces a bear market. (Oil illustrates a recent bear market with its price down more than 20% this year.)

Stocks have tripled over the past eight years, the fifth such rally in the last hundred years. The first was the famous boom in the 1920’s with three more in 1948-1961, 1979-1992 and 1988-2001. All came to an end through one or more of the four causes that put the brakes on bull markets.

The first is Recession or, in 1929, the Depression. Economist Paul Samuelson once joked that the stock market had predicted nine of the last five recessions. As this indicates, other causes can end market rallies but every recession has preceded a bear market or severe market “correction” of less than 20%. With moderate economic and job growth, recession risks are currently low. They would improve if Congress can ever pass fiscal stimulus legislation.

The second cause is rising interest rates with unchecked inflation. Even the Federal Reserve returning to rising interest rates, the federal funds rate is still only in the 1.00%-1.25% range, well below levels such as the 6.5% rate that choked the rally in 2000.

The third stems from hysterical valuations of popular stocks, such as Cisco Systems, a well-run company that sold for 196 times earnings in 2000. (It’s now at 16.) Many of those high fliers that had no earnings at all are no longer with us. Today’s soaring stars like Facebook or Netflix have stronger earnings and sales growth. Any severe disappointment could trigger panicked selling but the odds are less skewed than in less skeptical times.

War is the most disruptive, cutting across all areas. It is also the least predictable, with cautious hope developing through the decline in overt clashes between nations. Trade among them is widely seen as easing tensions between them and this remains a continuing concern.

These worries will always be with us and the stock market has nevertheless made a 9% gain (on the S&P 500) this year. That takes the S&P near 18 times earnings versus a long-term average of 15. This may moderate future returns and stock investors should emphasize stronger sectors, avoiding those suffering like oil or traditional retail. There will always be stocks on sale in the bargain basement but I believe gains come from quality.

Amazon (AMZN-$1,002) has never been on sale as it continues its amazing growth. Online retail sales are now around 12% of all retail after excluding autos and fuel and Amazon has half that and growing. Next year’s earning are estimated between $6.35 and $11.45, a remarkable spread and a huge increase from 2016’s $.52.

Technology and biotech are the fastest growing sectors. Amgen (AMGN-$174) and Celgene (CELG-$133). Amgen pays a 2.7% dividend yield, making it a particular fit for retirement accounts. Celgene is streaking in price with a solid earnings report expected in a month.

I am reiterating my buys in the large company tech sector: Apple (AAPL-$145), Applied Materials (AMAT-443), Broadcom (AVGO-$244), Microchip (MCHP-$80) and Nvidia (NVDA-$158).

Lam Research (LRCX-$149) is a new buy recommendation. This Silicon Valley company founded in 1980 develops advanced thin film products essential to the manufacture of integrated circuits. Sales are nearing $6 billion, up 35% this year, with full year earnings estimated at $9.80 to $10.00, up from $6.37. There is even a 1.2% dividend yield.

Even though the media feature worried critics and attention seeking alarmists, the market continues to send us strong signals. It’s like ‘Ol Man River:

He mus’ know sumpin’
But don’t say nuthin’
He jes’ keeps rollin’
He keeps on rollin’ along

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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