Taking Stock

Tony Crowell
Tony Crowell

Will There Be A Santa Claus Rally?

Retail sales picked up last month, Santa should be coming, the Federal Reserve may soon unleash its “taper” and it’s Friday the Thirteenth. That’s time to play Scrooge and ask if this robust year in the stock market has taken us into a “bubble.” After all, the Dow Jones just hit a record high, Twitter, which loses money, raised billions in its IPO and a new digital currency called “Bitcoin” is attracting media attention. (Bitcoin reminds me of an advanced technology pyramid club.)

Bubbles are described by Nobel Laureate Robert Shiller as “like a mental illness . . . marked by excessive enthusiasm, participation of the news media and feelings of regret among people who weren’t in the bubble.” They are often accompanied by expansions of credit but the forthcoming “taper” by the Federal Reserve will be a contraction.

Incoming Fed Chair Janet Yellen told the Senate Banking Committee that traditional valuations do not reflect stocks in bubble-like conditions. Some disagree but stocks are trading at 15 times 2014 estimated earnings, less than their 15-year average of 16.2 and well below peaks made in 1987, 2000 and 2007.

Reaching 16,000 on the Dow and 1,800 on the S&P 500 may have made the current rally seem extended but it is actually only average in both duration and magnitude among long-term averages.  Warren Buffett, speaking at his former grade school in Omaha, said that stocks are “in a zone of reasonableness,” “definitely no way overpriced nor underpriced.”

After a strong November, stocks have wobbled recently, raising investor anxieties. This is actually consistent with market history, which shows stocks often weak during the first half or even the first two-thirds of December, probably due to tax-loss selling and yearend mutual fund window dressing.

The full month of December is historically one of the market’s strongest. Gains from Thanksgiving to the end of the traditional “Santa Claus” rally in early January have averaged 2.6% since 1949. The economy expanded at 2.8% in the third quarter, below its potential, but above expectations of 2.0%. Prices for housing, energy and other inflation-sensitive assets remain under pressure but the outlook for manufacturing, technology, drug and select consumer stocks is strong.

Remarkably, there hints of improvement in the potential impact of Congress on the economy. Some budget compromises were reached and it seems increasingly probable that the country may be spared another fiscal crisis shootout in the next few months. Let us hope.

Growing oil and gas production will keep a lid on energy prices and increasing farm income will boost the prospects for agricultural suppliers. I recommended Dow Chemical (DOW-$40) last month and am adding DuPont (DD-$60). Both companies are shedding their traditional industrial chemical lines in order to focus on agriculture.

American Vanguard (AVD-$26), a smaller maker of insecticides and other agricultural chemicals, is down in price this year despite earnings growth. Cold and wet weather hurt sales earlier this year but it posted a solid third quarter and its cotton and peanuts markets appear pointing toward higher growth.

In farm machinery, Deere (DE-$86) is ramping up worldwide sales that are being ignored by Wall Street. It is trading at less than ten times earnings, an anomaly for an industry leader, despite a strong balance sheet and an increased stock-buyback program. It yields 2.3% on dividends increased for nine consecutive years.

One indication of a stock bubble is excessive public obsession with financial news. It is thus encouraging that financial medium CNBC reported its lowest third quarter ratings since 2005. The stock market seems to have absorbed much of the speculation on the Fed’s inevitable tightening of monetary possible. That became the barometer this fall for short-term market movements. With that worry out of the way, investor focus will return to corporate profits. These are at record levels and headed higher. Santa Claus is coming to town.

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 1993. [email protected] 949.494.1376/

800.697.2622 www.crowellroberts.com

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