Taking Stock

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Tony Crowell
Tony Crowell

September Song

Stocks sold off after a three-day weekend provided investors time to mull over a possible nuclear military conflict with North Korea and threats to the economy from severe hurricanes. They then resumed their stride, confirming the market’s uptrend, reestablished a month ago.

Wars and natural disasters typically produce only temporary effects in the stock market. Hurricane Katrina in 2005 is said to have been the costliest disaster in U.S. history yet its impact on the stock market is imperceptible on charts. The September 11 attacks led to closing the markets for the rest of the week and a sharp 12% sell-off, which was recovered in a month.

The market was already in a slump before the attacks with the S&P 500 having lost 16%. The events that make the headline news often have much less effect than less dramatic economic developments. The most dramatic stock market one-day crash took place almost 30 years ago on October 19, 1987. The Dow Jones Industrial Average fell 508 points to 1,739, a 22.6% drop that still holds the record for the biggest single-day percentage plunge.

There were no dramatic news events to blame for the crash. Various contributing factors show some parallels today and some significant differences. New and complex computer programmed trading vehicles using sexy new tools like index options and futures had been implemented to automatically trade these new tools. They overshot like Hal, the computer in the movie “2001,” entering multiple sell orders, creating panic on the human side and evaporating liquidity for stocks.

There were already then serious economic factors that escaped attention. Inflation was surging with oil prices having doubled in a year. The Consumer Price Index had jumped from 1.4% in January to 4.3% in September and the Federal Reserve’s Fed funds rate from 5.9% to 7.3%.

I was then managing a stock brokerage firm and remember vividly the funeral gloom. This cleared fairly rapidly after the Federal Reserve intervened and with stocks actually showed a small gain for the year.

Bull markets end with recessions, usually after investor optimism has risen to uniform levels of “irrational exuberance.” Lasting memories of the 2007-2009 “Great Recession” are tempering exuberance and most criteria remain reasonable. Interest rates provide much to inspire continuing stock price uptrends. The benchmark 10-Year Treasury rate is 2.05%, down from 2.50% in March and 3.0% in 2014.

In contrast, the “earnings yield” of the S&P 500 (the inverse of the Price: Earnings ratio) is 4.8% and the “dividend yield” is 2.0%. The clear advantage to stocks over bonds is the result of an increasingly strong economy with aggregate corporate profits running over a trillion dollars every year. There are marked areas of inequality that must be addressed. Fortunately, the economy is sufficiently strong to provide the means.

To stock investors, an obvious example is Apple (AAPL-$161). On dividends alone, it pays 1.6% with further increases ahead. That’s around the rate offered by a Two-year CD, with no possibilities of increase in value. Fixed rate “investments” like CD’s offer rates that are pitiful in comparison, yet many people, particularly seniors, cling to low-yielding bank products from ignorance, familiarity and fear.

Instead, why not buy bank stocks? JPMorgan Chase (JPM-$88) offers a 2.2% yield in dividends with 6 straight years of increases. Bank of America is paying 2.1%. It recently reported improved financial strength and a dividend increase should be coming soon. The continuing investigation of Wells Fargo has increased the number of fake accounts to 3.5 million. [!] There are other problems and there are certainly many other bank stocks.

The stock market survived the sometimes-wobbly summer months. September and October have so-so records while the usual year-end rally lies ahead. Stocks in large profitable growth companies will continue to reward those who accept the challenges and rewards of the market.

Oh, it’s a long long while
From May to December
But the days grow short
When you reach September

When the autumn weather
Turns leaves to flame
One hasn’t got time
For the waiting game

 

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

www.crowellroberts.com

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