Taking Stock

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Tony Crowell
Tony Crowell
Don’t Sell, But Keep A Weather Eye Out

Only a week ago, stocks rook a one-day header on news flashes of severe tensions with North Korea. The American dependency of Guam was threatened with missiles and local officials broadcast old Cold War civil defense procedures. Now, one week later, civil disorders in Virginia made this flare-up of brinkmanship seem like old history. The stock market regarded all this as irrelevant to American business and resumed its uptrend.

It then dipped again on renewed concerns of disillusionment in the love affair between business leaders and the Administration. Reduced trading volume in August exaggerates this short-term wiggling. Stocks are hanging onto their gains with the S&P 500 up over 10% this year, over half its historical average at this point. Typically, stocks tend to build on gains like those we’ve experienced so far in 2017 on a modest pace for the rest of the year.

With the Federal Fiscal Year ending on September 30, I feel the incompetence of Congress presents a danger to economic growth. Previous funding brinkmanship has been costly and there are no signs of a statesmanlike approach to the fundamental issue of funding our government. Congress reopens for “business” on September 5.

Meanwhile, stock investors should remain on course. This transition period is excellent for trimming their holdings. I suggest 65-80% in large cap growth stocks, 15-20% in short-term bond funds, 5% in small caps like Royce Value Trust (RVT-$14) and 5% in new farmland buy Gladstone Land (GLAD-$13). Investors should avoid retail stocks (except Amazon), gold and other commodities and oil, gas or coal stocks.

Longevity continues to rise, despite the efforts of Congress, as two London Business School Professors discuss in their new book, The 100-Year Life. They argue that the years from 65 to 100 will change from a 35-year-long retirement to a redistributed period of revived education, quite likely online, and second careers. All this will need money and all investors or potential investors need to begin funding these years now. An essential step is to open an IRA account, possibly both a traditional and a ROTH IRA, and establish or augment regular deposits.

Bond funds like EV Limited Duration (EVV-$13) or BlackRock Limited Duration (BLW-$15) currently pay at least 6% in monthly distributions. Most brokerage firms provide low-cost reinvestment of distributions, which should be elected to enhance compounding. Among stocks, Apple (AAPL-$158), Abbvie (ABBV-$70), Morgan Stanley (MS-$45) and Visa (V-$102) all have excellent records of increasing their dividends together with superior prospects for keeping this up in the years ahead.

The conflicts from Washington are disturbing and may ultimately derail the stock market’s advance. Presently, however, stocks continue their uptrend despite sporadic setbacks driven by an economic expansion now 100 months long. That’s long but still lagging the 120-month run from 1991 to 2001 and there are no serious signs of its end.

The most common cause of reverting to recession has been rate tightening by the Federal Reserve to fight inflation. There are other causes like the oil shocks that preceded global recessions in 1973 and 1979 or the credit collapses in 2007-2008, but none of these prior failures are showing storm clouds now and the Fed has a balanced diet of modest inflation and low rates.

Oddly, stock market crashes do not precipitate recessions or depressions but have been a byproduct of the end of expansions from other causes. For example, the bursting of the tech stock bubble in 2000-2002 wiped out almost half the value of the S&P 500 but the economic downturn was only eight months long and domestic national product barely flinched.

What’s left? Every now or then, for reasons only obvious after the storm, something shakes consumer and business confidence, spending drops severely and a recession follows. It could be storm clouds threatening from North Korea, investigations hanging over the Administration or a deadlocked Congress. Meanwhile, trim the ship and stay on course and always keep an eye to windward.

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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