Halfway through the second quarter, the market has gone nowhere so far this year. The Dow Jones Industrial Average is where it started the year while the S&P 500 has eked out a 2% gain. A year ago, their gains at this point were 18% and 11% respectively. Each added gains around 7% for the rest of 2017.
They’re sideways now. Oddly, volatility in 2018 is up sharply from 2017 even though the overall market has gone nowhere. The economy is strong and getting stronger, bringing with it the best season on record of corporate earnings updates. These trends are hatching continuing Federal Reserve actions to boost interest rates. In March, the Fed raised the federal funds rate to a range of 1.5%-1.75%. This was the sixth increase since December 2015 when the Fed started tightening monetary policy for the first time since the financial crisis.
The Fed has signaled three (and maybe four) rate bumps this year. Rates are and still would be in an historical low range that is unlikely to derail the economy. Still, higher rates will ultimately make bonds reasonable alternatives to stocks. Bond prices go down as interest rates go up and should not be bought (or even held) until the Fed signals an easing of interest rates.
These shifting trends demand that investors focus acutely on stocks with solid finances coupled with capabilities for earnings growth. Apple (AAPL-$186), Nvidia (NVDA-$246) and Visa (V-$129), my three largest positions, are prime candidates.
Last year, technology stocks led the big parade while energy stocks sagged. Oil prices have been rising, igniting oil and gas stocks. Noted oil analyst and Pulitzer Prize-winner (for The Prize) Dan Yergin predicts that oil prices could rise to $85 a barrel by July. Brent Crude oil, the international benchmark rose this week toward $80 a barrel, its highest level since 2014.
Demand is high and growing as are geopolitical tensions. Mr. Yergin noted that output is falling in crisis-ridden Venezuela, renewed U.S. sanctions on Iranian crude exports and wars in oil-producing Yemen and Syria. Some commentators suggest that we could be returning to $100 oil.
Pump gas prices are already up roughly 50 cents a gallon on the East Coast with higher California taxes gas prices prodding gas toward $4 a gallon. The impact on consumers is becoming noticeable as the effect on energy stocks. Energy analysts are raising energy estimates for our recent additions Royal Dutch Shell (RDS.A-$73) and ConocoPhillips (COP-$70), both up 5%-10% since recommended earlier this year.
Healthcare provides steadily increasing demand for its products and services. Recent new buy Merck (MRK-$59) is also up. Shell, Conoco and Merck each provides a dividend yield of 2% or more and I suggest additional purchases before their next earnings reports, which are due in late July.
I am adding Eli Lilly (LLY-$81), the Indiana-based developer of a broad line of pharmaceutical products that it markets worldwide. Lilly also has substantial lines of animal health products, also sold around the world. June quarter earnings are currently estimated at $1.30, up from $1.11 a year ago and earnings for all of 2018 at $5.15, up from $4.28. Securities analysts have raised these estimates substantially during the last 30 days.
Lilly combines a reasonable valuation with proven growth and a solid balance sheet. Current dividends provide a 3% yield with increase for the past three years.
The overall market, as reflected in the Dow Jones Industrial Average, is showing consistent strength in one long-range indicator, its 200-day moving average. (A “moving average” is a simple average, in this case of 200 trading days, with the newest closing price replacing daily he oldest close.) The Dow Industrial Average has not closed below its 200-day moving average for 474 sessions, its longest such streak since 1984-1987, and the seventh longest on record.
The earnings season is ending with the strongest results in seven years as the companies in the S&P 500-stock Index produced a combined 26% in their bottom lines. The Dow last hit a record high on January 28. Its now back to its December closing figure whole the U.S. economy is growing at 2.7%, ahead of 2017’s 2.3%. The market’s sideways motion may be a base for another leg up.
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