This is the way the first quarter ended-not with a bang but a whimper. Despite a last minute rally, the Dow Jones Industrial Average finished the quarter down 2% for the first three months of 2018. This snapped a streak of nine straight quarterly gains, the longest such streak for the blue-chip average since an 11-quarter run that ended back in 1997.
Corrections happen regularly and the market’s unusual lack of volatility in recent months is causing investors to overreact. This minor slip by the Dow is hardly cause for alarm after it was up 25% last year and 13% in 2016. The broader S&P 500 Index lost 1%, also ending its streak of nine straight quarterly gains.
The Nasdaq Composite Index, which gives greater weight to technology stocks, notched a 2% gain for the quarter despite ripples of selling tech stocks as the quarter ended. My portfolios, all weighted with stocks recommended here, are slightly ahead for the quarter. Among my five largest positions, Apple (AAPL-$171) and Amgen (AMGN-$171) are off slightly while Nvidia (NVDA-$234), Amazon (AMZN-$1,451) and Visa (V-$120) have increased their gains.
Market dips always provoke media chatter warning of overvalued stocks, possible accelerated rate increases by the Federal Reserve and adverse government actions such as new tariffs and threats of trade wars. Wars seldom resolve anything; particularly trade wars, and the impact of tariffs on the nation’s huge international businesses will hopefully remain more threatened than realized.
Bullish stock markets historically end not on these factors that produce headline fodder but on the economy sliding into recession. Fortunately for stock investors, the domestic and global economies are robust. Should their growth continue, it is possible that it could overheat, bringing higher inflation and rising interest rates. Economic growth and higher interest rates are only now showing firm recovery from the severe impacts of the 2007-2009 Financial Crisis and Recession and I expect the dangers of overheated economies are a year or two in the future.
The recent weakness in high-flying tech stocks was accompanied by revived strength in stable but less dramatically growing companies. In my first column this year, I cautioned against platform providers like Google and Facebook whom I felt faced government and consumer restraints that would impact their margins. Both are down sharply and should be avoided.
In contrast, I recommended MKS Instruments (MKSI-$117), then at $100, as an example of the earnings growth available from advanced technologies within innovative companies. Anticipating that increasing volatility would generate growing investor interest in companies combining greater stability with steadier growth.
I recommended Royal Dutch Shell (RDSA-$63), Merck (MRK-$54) and Diamondback Energy (FANG-$126). Recent weakness in tech stocks brought predictable attention to this group and I recommend that investors weight their stock portfolios toward a balanced diet.
Possible candidates would include Louisiana-Pacific (LPX-$28) and First American Financial (FAF-$58). Both would benefit from increased homebuilding activity, which is overdue. Louisiana-Pacific, which is actually based in Nashville, makes a variety of building products for new homes, light industrial and remodeling. First American, based here in Orange County, provides title insurance and other real estate services nationwide and overseas.
Both companies are expected to announce in April increased earnings for the quarter and, probably, raised projections for the year. Louisiana-Pacific’s is trading at 11 times earnings, First American at 15. Each yields around 2%.
These, like the earlier trio, are intended for new capital, as recent jitters in the tech sector are not a sell signal. The overall market will soon be reacting to earnings reports for the quarter that will begin in mid-April. Early indications are favorable and should soon translate to more robust markets.
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