Dutch Treat
With only a couple of weeks left in 2017, the S&P 500 Stock Index is up 19% so far this year. This uptrend continues despite the Federal Reserve raising rates for the fifth time in two years. The Fed indicated it would probably boost rates three more times in 2018. Assuming continued quarter-point rises, that would take the short-term federal funds rate to a range of 2.00-2.25%. That would still be the lower end of the Fed’s preferred sweet spot between 2 and 5%.
The Information Technology (“IT”) stock sector has been flat for a month but IT remains the leader for the year-to-date, up 35%. Healthcare is second, up 23% with Financials and Industrials up 17%. The IT sector has provided portfolio favorites like Apple (AAPL-$172) (up 46%), Nvidia (NVDA-$186) (up 70%), Applied Materials (AMAT-$51) (up 56%) and Microchip (MCHP-$55). Broadcom (AVGO-$258) is up 46%, another good reason for it to succeed in its takeover of Qualcomm (QCOM-$64), which is down one percent.
All of these are somewhat lower than their highs earlier this year, a natural trading rhythm that should not frighten the fearful into nervous selling. This might be “The Age of Aquarius;” it is certainly “The Age of Technology” and investors should overweight tech stocks.
Investors should also recognize a pattern of rotation from popular stock groups to those that appear to be catching up. A parallel pattern is increasing interest in selecting stocks that appear to offer “value” over “growth.” This approach emphasizes the value of a company’s assets rather than the expectations of its earnings growth.
With accelerating economic growth, favorable monetary policy and employment trends and perceived supportive legislation, all systems have been “Go” for stocks. Some slowing is inevitable and returns are likely to slow in 2018. Investors should remember that Rule One is to preserve Principal. (Rule Two is to remember Rule One.)
While retaining their growth stocks during continued review of their progress, Investors should consider asset-rich stocks like Royal Dutch Petroleum (RDS.A-$65). This is the world’s sixth largest company with a history dating back to the early 19th. Century. In 1908, it merged with Britain’s Shell Transport & Trading with the Dutch-based “A” shares holding 60% of the assets and the British-based “B” shares 40%. This dual arrangement continued until 2005, when the parts were combined.
With oil prices slumping, recent growth has been negative until recovering strongly this year. Estimates for 2017 earnings call for an average of $3.80 per share, up from $2.08 last year. Next year should see at least $4.40. The current dividend yield is 4.7% with anticipated increases in future years.
Following unification of the two share classes, the A and B stock traded almost identically with the A stock at a slight discount because dividends on the Dutch-based A stock were subject to a 15% withholding tax. A new government elected earlier this year eliminated this tax although the discount persists, currently around $.75, giving us a modest markdown.
None of the big oil companies is an environmental angel but Shell moved into renewables in the early 2000s. Last month, its CEO announced that Shell plans to cut 20% of its carbon emission by 2035 and 50% by 2050. Its 12-member Board of Directors represents seven nations and includes five women.
Late December and early January are historically strong for stocks. This year, the pending tax bill and possible bad news from North Korea are very much on investor minds. It’s still an open question whether stocks can close up for all twelve months of a year for the first time. The S&P 500 closed November at 2,647 and it’s currently at 2,655 so it’s up to Santa Claus to decide if investors have been good
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
