The Waiting Game
J.P. Morgan, when asked what the stock market would do, gave a very accurate prediction, “It will fluctuate.” Despite endless showers of advice and tips, that remains the wisest forecast today. The only differences now are widespread participation that has spawned huge financial media. In the last two weeks alone, market commentators have feasted on new tariffs, possible trade wars, revised tariff proposals, Federal Reserve interest rate hints and possible military action in Syria, all exacerbated through conflicting “tweets.”
Fear is a powerful deterrent to successful investing and nervous investors reacted with panicked selling and hasty buying. Mr. Buffett’s noted, “The stock market is a device to transfer money from the impatient to the patient.” Almost every day this month, the market has swung over 200 points in the Dow Industrials. That’s less than a 1% swing at today’s levels.
Despite all the sound and fury, the three most popular averages are ahead since the first quarter ended two weeks ago. Both the Dow Industrials and the S&P 500 lost 1%-2% in that quarter while the technology-heavy NASDAQ was up 3%. This reflects the continuing gains among growth stocks, however, stronger relative gains are developing among the more traditionally valued stocks that I have been emphasizing recently.
Royal Dutch Shell (RDSA-$68), which I recommended in my February 23 column at $63, has quietly moved up. Analysts expect it to post its first quarter earnings on April 26. Earnings announcements will soon begin to take center stage among financial news and analysts average forecast is for $1.24 for Shell, up from $.92. The current average estimate for all of 2018 is $5.10, up from $4.04. These figures make its stock a good value at a P/E of 13 with an accompanying dividend yield over 5%. Analysts have increased their forecasts in recent weeks and I have been adding to our positions.
This is illustrative of the boost that I anticipate the blossoming earnings season will bring to overall stock prices.
According to FactSet, a financial data firm, first-quarter earnings growth will exceed 17%, the highest rate since the first quarter of 2011. As 2017 was ending, the forecast was for 11% growth. With the chaotic turmoil during the first three months of 2018, this reflects sharply higher confidence underlying the forthcoming earnings reports.
Much of this optimism comes from the widespread benefits to companies from the recent massive tax legislation. Even though its benefits are targeted toward corporations and high-income taxpayers, the tax bill seems to have contributed to consumer confidence hitting an 18-year high in February.
The Federal Reserve has been circumspect in presenting its courses of action, allaying Wall Street fears from uncertainties. The markets were completely unsurprised by its rate hike in March. Current economic signals indicate no expected action at its May 2 meeting.
The Fed’s policies continue to keep interest rates at historically low levels. 10-year Treasuries yield 2.83%, not enough to tie up funds while stocks continue to provide the best game in town. It is quite possible that another year or, more likely, two years will find the Fed raising rates sharply to stifle an overheating economy but some stock investors have an attractive extended window of preferred opportunities over bonds.
Analysts are also raising forecasts for DowDuPont (DWDP-$66.) It expects to report earnings on May 8 and current estimates are for $1.08-$1.10 for the quarter and $5.43 for the full year. The expected P/E is 12 with quarterly dividends at $.38, pending its planned splits into three companies in 12 to 14 months.
Warren Buffett’s partner, Charlie Munger, said, “Waiting helps you as an investor and a lot of people just can’t stand to wait. If you didn’t get the deferred-gratification gene, you’ve got to work very hard to overcome that.”
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