Stocks shocked the world with a record 1,175-point drop in the hallowed Dow Jones Industrial Average. They then thrashed around for a while before steadying with five straight up days. These five days took the Dow over 5%, the largest five-day gain since 2016. The three major averages are now again in the black for the year. Currently, the Dow appears headed for a fifth straight gain and is flirting with again trading above 25,000.
Technology stocks continue to lead the way. The tech-heavy NASDAQ index appears headed for its strongest rally in four years. Financial stocks are showing their best gains since November.
Economic signals currently show increasing earnings for key companies that should support stock prices through the entire year. These signals represent fundamental shifts in both the economy and the stock market as a combination of tax cuts and increased fiscal spending are raising concerns of increasing inflation, higher interest rates and soaring federal deficits.
These are already taking effect with the key 10-year Treasury yield just under 3%, its highest level in four years. Until recently, global economies were trying to shake off the stagnant growth that followed the Financial crisis. Our Federal Reserve led other central banks to an unprecedented series of interest rate cuts and other policy steps like bond purchases that created a reassuring cushion for expansion.
It may be that investors had become so used to good news that they had become complacent. Thus, on Groundhog Day, when average hourly wages were reported to have grown by 2.9%, the highest since 2009, investors sold stocks in fear that inflation was back and that central banks would be pushing up interest rates. Well, they will, but moderate inflation coupled with a return to more traditional interest rates is not a recipe for disaster.
Recent market gyrations frightened nervous hedge funds and other “investors” who had bet against stock market volatility through trading the “fear gauge” or VIX. This shot up with market turmoil, causing some short-VIX funds to lose over 90% of their value-in a week. Smarty-pants hedge fund operators had peddled these to institutions including Harvard and the State of Hawaii, echoing the overly clever maneuvers that sent Orange County into bankruptcy in 1994.
Some things don’t change. Investors will overreact to fear and greed and some, like hedge fund customers, will be concentrating on picking pennies off the street when a truck runs over them. The rules haven’t changed but conditions have changed on the financial playing fields.
With the federal deficit pointing toward $1 trillion, the economy may eventually overheat. Investors should emphasize stocks like the dominant tech companies with large profit margins and little debt.
Applied Materials (AMAT-$52) is an outstanding example. This leading provider of equipment and services to the entire semiconductor industry announced sharply increasing orders. Its management said that the chip cycle is increasing into new markets like artificial intelligence, cloud storage and autos.
The advanced medical technology sector has similar advantages. AbbVie (ABBV-$114), which just increased its dividend, and Edwards Life Sciences (EW-$134) are expected to post solid earnings increases that will keep them ahead of the pack.
Apple (AAPL-$172), our largest position, remains a solid buy. Mr. Buffett’s Berkshire Hathaway added to the Apple position that it initiated only two years ago. It is now worth roughly $28 billion. (It dumped most of its IBM.) Berkshire initiated a position in Teva Pharmaceutical (TEVA-$20), an Israeli developer of generic and other drugs. Recent sales and earnings forecasts were weak, however, it is reasonably valued and a possible buy.
After Broadcom (AVGO-$251) initiated a hostile takeover of Qualcomm (QCOM-$65), I began accumulating Qualcomm stock in anticipation of a higher bid. This took place, however, Qualcomm stock remained stagnant, suggesting that this large and complex merger was increasingly in doubt. A two-hour meeting between the parties went nowhere and the prospects of the merger now rest on a proxy fight at a Qualcomm March 6 shareholders meeting. Broadcom’s volatile CEO has stated he will drop the merger if he loses the proxy fight. Qualcomm is fighting hard to retain its independence and I sold our positions, essentially at breakeven, rather than accept the risk of the takeover attempt being abandoned.
Investors should keep their course despite variable crosswinds. The seas will probably remain choppy but sticking with quality growing stocks will continue to be rewarding.
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