Taking Stock

Tony Crowell
Tony Crowell

Sleigh Bells Ring, Are You Listening?

Despite some nervousness toward the end of November, the stock market finished the month in positive territory. That makes eleven straight months with the S&P 500 closing without a losing month, a streak not seen for 90 years. Should the market close December on the upside for the month, it would mark the first such calendar year without a monthly loss.

Short-term, stocks are gyrating on news and rumors whether Santa Congress will stuff the Christmas stockings of U.S. corporations with lower tax rates. The debates bring to mind the verse credited to Senator Russell Long of Louisiana:

Don’t tax you,

Don’t tax me,

Tax that fellow behind the tree.

The detailed media coverage shows the wisdom of Otto von Bismarck’s comment, “Laws are like sausages. It is better not to see them being made.”

Assuming the tax legislation doesn’t flop, stocks have several tail winds that could send them to new records. They certainly have momentum, pushing through today the 24,000 mark on the Dow Jones Industrial Average, the fifth time this year they’ve cleared a new 1,000-point level.

The calendar is favorable. December is the best month of the year, based on the S&P 500. Since 1950, it’s averaged a 1.6% gain with 49 winning months and 16 down. The three-month period of November through January has also been strong with an average 4% gain.

Stock prices respond primarily to earnings, not the calendar or politics, and the U.S. economy is running at its full potential for the first time since 2007, just before the 2007-2009 Recession. This period saw the loss of 8.4 million jobs, by far the largest employment contraction of any recession since the Great Recession.

Total economic output in the third quarter exceeded potential GDP for the first time since the fourth quarter of 2007. That foretold a slump that did not bottom until mid-2009. The subsequent recovery from this severe drop is the foundation of the sustained bull market that began in March 2009 with the Dow Jones Industrial Average at 6,440, almost 18,000 points lower than today.

Investors should not allow complacency to sink in. Richard Thaler, the Nobel prizewinner, calls one investor bias “the house money effect,” the gambler willingness to take more risks when they feel they are playing with “house money” rather than their own. Emphasizing large growth stocks has brought success and successful strategies should be continued, not diversions into speculations like Bitcoin.

This “virtual currency” has gained tenfold this year, apparently on the persisting old theory that buyers can always hope to find new buyers at higher prices. That has worked so far but the participants seem to share a common mass delusion. It’s like twenty people isolated after a natural disaster who create a billion dollar economy by doing each other’s laundry at a billion dollars for a shirt.

Black Friday through Cyber Monday was a big hit for all retailers and traditional retailer stocks bounced, possibly on some sort of belief that they would benefit from the tax bill. Amazon (AMZN-$1,171) is the stock to buy and keep. Besides its record breaking online sales, Amazon Web Services, its cloud computing division, now has 44% of the cloud. This division brought Amazon $12 billion in revenue for the first nine months of the year, up 42% from last year.

The pending $70 bid by Broadcom for Qualcomm (QCOM-$66) is keeping its price in the high $60’s in the absence of further developments. Broadcom may initiate a proxy fight to challenge Qualcomm’s Board of Directors. That doesn’t preclude a higher offer, which continues to be a highly probable development. This merger arbitrage is a very attractive buy recommendation.

As the song goes, “It’s the most wonderful time of the year,” (especially for investors).

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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