Nervousness Is Normal,
Euphoria Is Not
Stocks began to weaken in June with prices eroding among the technological stocks that had led the market’s advances this year. This seemed to spread from investor fears that they would watch their gains disappear. Too much watching of stock price movements builds anxieties that caused the fearful to miss the resumed strength this week in these leading growth stocks.
The rebound among the semiconductor stocks came after their industry group reported a 22% jump in global sales for May above the year-ago period. With economic growth improving only at a moderate pace, this reflects the breakthrough growth available from advanced technology.
Financial stocks continued to make up for their indifferent performance earlier this week. I’m reiterating buy recommendations for Morgan Stanley (MS-$46), JPMorgan Chase (JPM-$94) and Bank of America (BAC-$25). Having passed another round of regulatory “stress tests,” the banks will undoubtedly raise dividends in the near future.
All three handily beat estimates for their first quarter earnings and are on their way to very favorable results for the full year. With the Federal Reserve’s program for higher interest rates well underway, the bank sector is timely. Higher interest rates will eventually lower the steam on the market although Wall Street believes that higher rates will enhance profits for banks.
Oil prices continue to weaken. This will give consumers a lift and enhance the margins of companies like FedEx (FDX-$216) and United Parcel Service (UPS-$109). Both reported quarterly earnings that drove through analyst estimates and both are attractive buys. UPS is particularly suited for retirement accounts with a 3.0% dividend yield and increases for the past seven years.
Sir John Templeton, a legendary far-sighted investor, said “bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.” Assessing the psychological states of investors is largely subjective but there are clues like the aggregate size of margin debt and the excesses of bullish stock newsletters that indicate we are now in the skeptic to optimistic camp. The perceived prospects of a more pro-business tolerance in Washington helped lift stock prices. With Congress turning its attention to summer recesses, the implementation of new policies will probably be further delayed.
The possible impact of tensions with the renegade government of North Korea should not be underestimated. Its “Supreme Leader” may appear as a buffoon but he has been in power for six years. The extent of the persisting cult of personality was illustrated when a 14-year old schoolgirl drowned while attempting to rescue portraits of the two recent leaders from a flood. Any outbreak of overt hostilities would, among other consequences, send shock waves through the markets.
After such initial reactions, U.S. stock markets have always recovered, adjusting to subsequent inflations brought on by government spending. Northrop Grumman (NOC-$260) and General Dynamics (GD-$200)) will benefit from such tensions.
Existing conflicts are being fought out in cyberspace. Cyber security is becoming a developing industry. Palo Alto Networks (PANW-$133) and Symantec (SYMC-$27) are substantial technological leaders but both have irregular earnings. This is an increasingly vital field and I am initiating a buy recommendation on Cisco Systems (CSCO-$30).
Cisco provides excessively broad and varied lines of networking products and services. Fortunately, it is now emphasizing cybersecurity, its fastest growing business. Rather than selling add-on equipment, it is building on its existing service relationships. Amazon (AMZN-$971) built an enormous business on its Amazon Web Services and Cisco has a similar opportunity. This will take time but its 3.7% dividend yield will ease the waiting.
Waiting is usually frustrating but almost always rewarding for investors. Many price fluctuations are due simply to rotation among stock sectors and investors should avoid hasty selling at the first signs of concern. The time to sell is when euphoria has set in and concerns seem to have vanished.
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
