Taking Stock

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Tony Crowell
Tony Crowell

The Rally Broadens

The stock market rally continues and its participation has become broader. Technology gains dominated the 2017 market. They are continuing but other sectors are joining in. Medical and biomedical stocks, Real Estate Investment Trusts, homebuilders, aerospace, security software and even utilities are joining the party. The results have been new highs on the S&P 500-stock index and the NASDAQ.

New highs are one of the strongest technical indicators, signaling continuing momentum for stock market bulls. Any severe “bombshell” like open hostilities with North Korea would reverse this momentum but the risks of such so-called “black swans” are always present. Investors who have folded their hands for fear of such risks are missing out on participation in the world’s strongest economy. There will always be fluctuations, corrections and negative surprises but there will always also be positive surprises.

Over the last century, stocks have returned about ten times the gains from government bonds. Between 1990 and 2010, a period that included the 2007-2009 Recession, the S&P 500 index rose at a 9.1% annualized rate. Subtract a 2% inflation rate and the “real” investment return was 7%.

That’s a pretty good argument for sticking with stocks. Unfortunately, the media drum up so much hysteria about risks that worried investors often find it difficult to stick it out. Certainly, there’s a 20% drop every five years or so; successful investors like Warren Buffett use these inevitable periods to add to their positions. Sadly, data show that the average stock fund investor only got a third of that 9.1% annualized return that they could have gotten if they had stayed put.

Pascal wrote, “problems stem from man’s inability to sit quietly in a room alone.” Mr. Buffett works quietly from a small office with classical music, CNBC on the TV (with the volume off) and spends 80% of his time reading with only an occasional phone call. The results are exemplary.

Apple (AAPL-$160) is on the Honors list again. Its newest iPhones were well received despite prices in four figures for the sleek new iPhone X. Ten year ago, market leaders were BlackBerry and Palm. That was before Apple introduced the iPhone and proceeded to sell over a billion of them in ten years. After new model introductions, its stock price sometimes sells off as critics look for things to whine about. This hasn’t happened yet but possible price dips may present opportunities to augment positions.

This week’s Corporate Walk of Shame features Equifax (EFX-$115). The company belatedly disclosed a massive data theft that may impact 143 million U.S. consumers. Company insiders sold stock between their discovery and disclosure of the breach, easy fodder for lawyers recovering profits from insider trading. Equifax made things worse by offering a “free” credit protection plan (since modified) that was not exactly free.

The company has inspired a unique innovation in jurisprudence, computer-assisted mass lawsuits. Some web sites known as “bots” like DoNotPay are rolling out forms that millions of damaged consumers can download, serve and sue Equifax in Small Claims court in any of the 50 states. I would not care to be an Equifax officer or a shareholder.

Amazon (AMZN-$986), a disruptive force like Apple, is advancing on all fronts. The Nordstrom family will probably take private JW Nordstrom (JWN=$47). Retail stocks rose hopefully on this news, a silly reaction, as the Nordstrom family owns 31% of its stock and similar deals are unlikely. Successful turnarounds of retail stocks under pressure are rare and the entire sector is a “Sell.”

Economic signals are improving, a prelude to the Federal Reserve resuming increases to interest rates. This will slow market momentum and investors should continue building reserves in short-term bond funds and capable REIT’s like Gladstone Land (LAND-$12). Its stock dipped briefly as the company raised additional capital.

Franklin Trust (FT-$7-5.2% yield) is a hybrid Prius of a stock with one-third in utility stocks and the rest in short–term bonds. AT&T (T-$36) stock remains under pressure pending approval of its Time Warner acquisition. Dividend yield is 5.5% with the company likely to maintain its record of modest annual dividend increases.

No column for the next two weeks during a vacation in Spain. Current momentum should take us to another successful quarter with improving prospects for a year-end rally.

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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