Three For The Road
Aftershocks continue from the Financial Crisis and the worldwide Great Recession, which bottomed out five years ago. Their impact was the most severe since the Great Depression. Scars to the global economy were deep and widespread with a lasting impact on investors that is doubtlessly stretching out the global recovery.
The U.S. stock market peaked in October 2007 with the Dow Jones Industrial Average above 14,000, and then plunged to a trough around 6,600 in March 2009. Corporate earnings have revived with vigor as growing stock prices forecast continuing improvement. Five years later, the Dow continues to flirt with new highs, which have already been reached by the S&P 500.
The interlocking of global economies took them down together, further slowing the pace of recovery. The stock market recovery from the 1929 crash was actually over in less than five years even though it took more than twenty-five years for the Industrial Average to recoup its 1929 levels. The early recovery was aided by unusual deflation with the Consumer Price Index down 18% by 1936. Another came from dividends, richer in the 1930’s, and actually yielding 14% at the market low in 1932.
The current stock market recovery has been slower than the historical pattern, which has allowed earnings to keep closer to its advances. The P/E average of the 500 companies in the S&P 500 is around 17, about average historically, and well below market peaks. Interest rates and inflation remain low and investor memories of frantic selling few years ago keep a healthy sense of caution in most areas of the market.
Behavioral finance teaches that investors tend to overweight recent events. Thus, confidence builds toward market peaks only to be followed by despair at bottoms. Stocks have churned so far this year, prompting some fearful selling. The numbers are bigger and the economies global, thus we are probably in for more price volatility.
Volatility need not be harmful if employed to continually prune and tune holdings toward stocks of more consistently growing companies. The stronger sectors include technology, manufacturing and some areas of finance. Consumers remain tentative with retail sales still sliding and the housing market stagnant. Some of these weaknesses are probably attributable to recent severe weather but I remain cautious on these sectors.
Market volatility builds revenues for exchanges. There are three leading groups: CME (CME-$74), which operates three futures exchanges; CBOE (CBOE-$57), the global options market; and Intercontinental Exchange (ICE-$204), my favorite, operating a worldwide network of 17 exchanges, including the New York Stock Exchange. The company is based in Atlanta, which would doubtlessly have pleased Rhett Butler.
European regulators delayed its acquisition of the NYSE until recently. Including NYSE operations will help build sales this year to around $3.8 billion, more than doubling last year’s results. Earnings per share last year were $8.17 and estimates call for $11.00-$11.25 for 2014, a forward P/E around 18.
American Express (AXP-$90) is a solid player in the financial sector. Both sales and earnings have been growing steadily since the financial crisis and earnings this year should come in around $5.50 a share, up from $4.91. Its prospects complement Visa (V-$221), already a successful continuing buy.
Fastenal (FAST-$48) is a Minnesota-based provided of fasteners and other industrial and construction supplies. Growth has been unusually steady in the low teens but slipped last quarter, bringing the company into an attractive buying range. Yield is 2.0% with dividend increases for the last three years.
Stocks appear to be taking a normal pause. Investor morale is still strong and I expect new highs for the market averages later this spring.
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/