Taking Stock



By Tony Crowell
By Tony Crowell

12 for 12

The stock market stopped to catch its breath and clear its throat before announcing its next move. This bull market has been with us since it bottomed on March 6, 2009, with President Obama saying, “profit and earning ratios are starting to get to the point where buying stocks is a potentially good deal if you’ve got a long-term perspective on it.” With the Dow Jones Industrial Average then at 6443 and now at 23000, that was a good stock market call.

The uptrend has been remarkable with stocks gaining on each of the eleven calendar months preceding the current month. If December continues this streak of gains, it would be without precedent. November closed at 24,272 and the Dow is currently around that same level.

Will it achieve a run of twelve? Were this a coin flip, the odds would be an even chance. (This differs from the odds of a coin flip of straight twelve heads, which is 4,095 to one, possibly a better bet than buying a Bitcoin right now,) Stock market direction builds on momentum, business expectations and investor attitudes, all of which are presently in sync to the upside.

This would reverse immediately on a negative surprise from North Korea or an inability by Congress to get business tax cuts passed or to avoid a government funding crisis. Barring any such event, primary economic trends are all “Go.”

The global economy is firing at full speed with the U.S., Europe and China all displaying strong growth since they all tanked in 2007-2009. These concurrent expansions will eventually overshoot, bringing inflation and higher interest rates. These familiar perils lie years ahead as Europe’s recovery will be absorbed by current high unemployment and China’s by excesses in manufacturing capacity.

Next week, the Federal Reserve will meet and probably increase rates a quarter-point to a range of 1.25-1.50 percent. These are still low rates, a pattern now prevailing worldwide and whose success is now accepted. When central banks forcefully implemented near-zero rates and monetary easing to defeat the Great Recession, many feared these unprecedented monetary-policy experiments would fail or produce even worse financial instabilities. The policy nevertheless produced positive results and the U.S. economy did not later fall back into recession as economic stimuli were reduced.

Asset prices increased, actually accelerating after 2013 when the Fed began to “taper” monetary expansion. Investors remained far from euphoric, often fearfully clinging to well known but slowing companies like GE and AT&T. Market leadership shifted to forward thinking technology, financial and healthcare companies. Rising asset valuations will produce concerns and even the best companies will have temporary setbacks.

Investors who obsess over short-term stock price fluctuations will damage their investment returns. While it can be expected that overall returns will moderate from their double-digit pace this year, our strategy of core positions in high quality, growing large companies should be maintained.

Broadcom (AVGO-$263) beat estimates on sales and earnings while raising its outlook and its dividend. It continues its march toward takeover of Qualcomm (QCOM-$64), striking this week with a proposed new Board for Qualcomm, while deferring a (almost certain) higher bid until next year. Qualcomm is a most attractive merger arbitrage. The outcome is uncertain but the probability of profit beats a coin flip.

Hotel stocks are doing well and Pebblebrook Hotel Trust (PEB-$37) is a new buy. A relative newcomer, this Real Estate Investment Trust is an opportunistic acquirer and developer of upscale hotels in major growing cities. It owns 28 hotels in 9 states and D.C. with 5 in California. Yield is 4% with increases for the last 4 years.

Whether the stock market can hit for twelve straight months is an interesting gamble. What is significant for investors is that this is even a possibility. With rising corporate earnings and supportive Federal Reserve policies, investors have the wind at their backs.

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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