Taking Stock

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By Tony Crowell
By Tony Crowell
Time to Cultivate Our Gardens

Another month, another record. On the second day of August, the Dow Jones Industrials closed at 22,026, after earlier this year going through 20,000 and then 21,000. This is the thirtieth time this year that the Dow has made a record close. Now, it’s August, typically a low volume month that is a prelude to action developing in the fall.

All these records have produced an extraordinary amount of media space and airtime, all spinning around the ever-popular question, “What’s the market going to do?” The best answer yet came from J. P. Morgan, “Madam, it will fluctuate,” a comment holding more wisdom than a big TV screen full of babbling blowhards.

All these conflicting predictions may agitate investors into unneeded stock transactions. I continue to feel that almost all stock investors could benefit through developing more patience, a quality made easier to strengthen by avoiding day-to-day price fluctuations. As Mr. Morgan pointed out, these are inevitable. Most investors could improve their results by tending a thoughtfully chosen garden of perennials, rather than more short -lived annuals.

Certainly, investors should usually weed out companies suffering adverse internal or market changes, choosing those that bloom amid today’s volatile technology challenges. Apple (AAPL-$155) made new highs on quarterly results that handily smashed through estimates by nervous stock analysts who had squirmed for attention by whispering doubts about iPhone sales. This is typically Apple’s weakest quarter, yet it sold over 40 million iPhones and reported solid gains in iPad and Mac sales.

With over $200 billion sales and the largest market capitalization around, the company is so big that maintaining its growth pace is harder, yet it manages and manages very well. It overcame its biggest recent challenges — developing and introducing the iPhone in 2007 and the death of Steve Jobs in 2011.

Remarkably, its stock trades at only 18 times its reported earnings while the price-to-earnings ratio for the S&P 500 as a whole is just above 21, Apply that to Apple and it would be trading $30 higher. That won’t happen soon but investors should remember that its current dividends pay its holders a 1.7% yield with annual increases for the last four years. Its stock is a core holding, pun intended.

The continuing disorder in Washington is unsettling, yet Wall Street and corporate America are booming. Besides Apple, blue chips like Caterpillar, McDonald’s, Boeing, Ford and U.S. Steel reported strong earnings that exceeded estimates. With most of the S&P 500 having reported, 73% of the companies beat prior estimates. The market surge than began last year on optimism that tax reform and infrastructure spending has been replaced by one more firmly founded in economic reality.

Moving to new highs inevitably raises concerns of overvaluation. By some measures, current stock values are pushing the envelope, however, increasing corporate earnings and persisting low interest rates are encouraging. Recent market tops in 2007 and 2000 were both preceded by collapsing bank stocks. The financial sector is not struggling today, quite the contrary, it is the third strongest among the S&P 500’s ten stock sectors.

The most immediate political pitfall is the need for Congress to reach an agreement to raise the debt ceiling and fund the government by the end of September. Failure would be costly. Debt-limit brinkmanship led to a 16-day government shutdown during the Obama Administration in 2013. This unprincipled stupidity sucked $24 billion from the economy and kicked sand into the pace of economic growth. Partisan quarreling over spending cuts and funding for a border wall could lead to another government shutdown.

Beyond growing company profits, the economic recovery must broaden. Home ownership has dropped slightly and only 15% of Americans own stock, thus the growth in asset prices still leaves many behind. Those fortunate enough to own stock and homes should avoid fearful fretting about what the market may do and follow Voltaire’s advice in “Candide,” “We must cultivate our gardens,”

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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