Taking Stock

Tony Crowell
Tony Crowell

The Waiting Game

The stock market sometimes behaves like a teenager learning to drive, switching between hitting the brakes and the gas pedal. A historic streak came to an end with the close of trading on Wednesday, the final trading day of February. The S&P 500   fell 2.6% over the month. That drop represents this benchmark index’s first such decline since October 2016, meaning an uninterrupted 15-month rally came to a close. That is by far the longest such streak in the history of the S&P; the previous record, a ten-month streak in 1995.

Having its first “correction” (a 10% drop) in two years, stock soothsayers are now competing to find some sort of signal for the next one. Their current focus is on the new Federal Reserve Chairman, Jerome Powell, who took the helm after previous Chairs Bernanke and Yellen skillfully led a recovery from the most severe downturn in fifty years.

The financial media attempted to parse his remarks for clues whether there will be three or four interest rate raises this year. Rates are still not far from historic lows and the Fed has repeatedly said that such decisions will turn on developing economic data, not on some sort of prearranged schedule. He sensibly concluded that the Fed is now focused on striking “a balance between avoiding an overheated economy and bringing…inflation to 2% on a sustained basis.”

More concrete signals for stocks will come in a month with the first round of quarterly earnings reports. These will be impacted by new bills that will cut taxes by $1.5 trillion over the next decade while increasing government spending by $300 billion over two years.

Mr. Warren Buffett’s newest letter to Berkshire Hathaway shareholders acknowledged these influences writing, “A large portion of our gain did not come from anything we accomplished.” Of its whopping $65 billion net worth gain, $29 billion came from the tax “reform” bill.

I believe his most important message to investors in stocks or anything else was his reiterating his aversion to leverage as “insane to risk what you have and need in order to obtain what you don’t need.” On stocks, he wrote, “There is simply no telling how far stocks can fall in a short period. Even if your borrowings are small . . . your mind may well become rattled by scary headlines and breathless commentary. And an unsettled mind will not make good decisions. “

These decisions will be aided by a long-range focus on the rewards that come from larger quality growth stocks. Looking at a few, JPMorgan Chase (JPM-$113), the most profitable bank in U.S. history, boosted its expected returns on equity by three percent from higher rates while also expecting a windfall from the tax overhaul. Bank of America (BAC-$31), a new Buffett favorite will have similar benefits.

Among the fastest growing sectors, increasing volume on higher prices is particularly favorable for Nvidia (NVDA-$230), Alibaba (BABA-$181), Applied Materials (AMAT-$56), Lam Research (LRCX-$189) and Edwards Lifesciences (EW-$131). Threats from Russia, North Korea and other troubling areas will inevitably bring increased funding for defense. Genera Dynamics (GD-$218) and Northrop Grumman (NOC-$338) are already growing at double-digit rates and analysts are beginning to raise earnings estimates.

Novo-Nordisk (NVO-$50), the Danish-based leader in diabetes care, reported significant progress in Phase III trials for its new oral treatment for Type 2 diabetes. The advanced medical technology field is demanding and Celgene (CELG-$87) slid on disappointing results from trials for a new MS drug. It’s now at a P/E ratio of only 10, very low for such an advanced company.

Recent months unsettled investors after an extended period of low volatility. March holds hope as it is the second strongest month over the past two decades and April is first. Regardless, investors will always do better if they keep perspective and refuse to let frenzied financial media rattle their nerves.

Stock declines will always come without warning as Mr. Buffett says; “The light can at any time go from green to red without pausing at yellow.” When major declines appear, he says to heed these lines by Rudyard Kipling:

If you can keep your head when all about you are losing theirs . . .
If you can wait and not be tired by waiting . . .
If you can think – and not make thoughts your aim . . .
If you can trust yourself when all men doubt you…
Yours is the Earth and everything that’s in it.

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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