A Midsummer Night’s Nightmare
A proven stock market maxim is that in the short term, the market is a popularity contest. In the long term, the market is a weighing machine.” In recent weeks, accelerating trade skirmishes over tariffs dominated market action. Stocks dipped on the news, then tended to recover as if they were getting bored with the developing story.
As often happens, the market’s initial reaction to new developments is overdone. Even the latest threat to impose $200 billion new tariffs, if ever implemented, would subtract only 0.1% from the U.S. Gross Domestic Product, which is now nearly $20 trillion. Investors should focus on the impact of trade tensions on both corporate and consumer confidence in the economy.
Retail sales are climbing back after their businesses last year yielded to e-commerce. The Internet has the whip hand and Amazon (AMZN-$1,795) is an essential stock. The second half of the year is always the most important for retail as it includes “Back To School” and the holiday season. Traffic is up in mass market stores led by discount retailers. The stocks of TJX (TJX-$94) and Costco (COST-213) are not on sale as they approach new record highs but their stocks justify paying full retail.
Looking past current worries about tariffs and strains on alliances, the new corporate earnings season opens on Friday, the thirteenth. Current estimates look to increases among the S&P 500 of a strong 20.7%, the highest rate since 2010. The energy sector led the first quarter increases and was expected to repeat before the tariff headlines broke out. The industrial sector is expected to be up as much as 23% and leading stocks in the sector are good values.
Accenture (ACN-$167) is a new buy in this sector. The Dublin, Ireland-based company has $40 billion sales worldwide, providing consulting, technology and outsourcing services. Over three quarters of the Fortune 500 companies are clients. Its capabilities cover a broad range including financial services, health and public service and product development from basic research to marketing, including Artificial Intelligence, blockchain, the Cloud, Internet of Things and cyber security.
Accenture beat estimates for the last quarter and its next earnings report is expected in late September. Current estimates show the company on track for $6.75 this year, up from $5.91. It offers a 1.6% dividend with increases for twelve straight years.
Defense stocks are regaining momentum, aided by possible increased spending from other NATO countries. These expectations were boosted by new suggestions that smaller NATO members might be assisted in these purchases. Northrop Grumman (NOC-$320) expects $3.82 for the quarter, up from $3.15 and several analysts have raised estimates over the past month. General Dynamics (GD-$192) is similar.
As the earnings season unfolds, investors should be alert not only for the impact of proposed tariffs but also for the strengthening dollar (which retards exports) and early signs of price inflation. The Fed meets again at the end of July before a two-month gap and the prospects for further interest rate increases will arrive in the midst of earnings reports.
Bank stock profits continue to be held back as the gap narrows between short-term and long-term rates. Visa (V-$139) and Blackrock (BLK- are currently the most attractive buys in the financial sector. Blackrock’s assets under its management are approaching $7 trillion, bigger than the gross domestic product of all the countries in the world except the U.S. and China. Visa processes trillions of transactions worldwide accurately and quickly. Its earnings are up 13%, exceeding $5 billion, and it recently raised its forecast.
The second half of July typically brings a quieter market as a summer lull sets in. After the midsummer turmoil of accelerating possible trade wars together with possible disruptions of economic and military alliances, a pause for reflection is welcome. That’s always beneficial for investors, who should reinforce their perspectives by turning away from headline news, remembering that the longer-term stock market will continue to weigh the relative strengths and weaknesses of every stock they own.
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