Pyrotechnics on the Street and in Mid Air
Stocks celebrated the Glorious Fourth with fireworks, as the Dow Jones Industrial Average finally went through 17,000. Investment returns are shining under “the rockets red glare.” Like rockets, stocks shoot up and then come down, but these ups and downs are inherent in markets.
Investors who allow stock price fluctuations to scare them away from stocks are missing the most successful investment medium measured over any ten-year period. That long-range perspective is essential and investors who obsess over daily price movements are often frustrated. Investment analysis is actually pretty dull work and those whose pulse rates accelerate when exposed to breaking news of market action might consider professional investment management.
Emotions drive short-term market fluctuations. When prices go up, people feel more confident that this will continue, breeding additional buying and more price gains. This developing optimism pushes out the fears left over from previous dips, sometimes resulting in market peaks at the crests of optimism.
This is one reason most mutual funds fail to keep up with market averages. It seems to be human nature to flood their investment managers with new money at market peaks and then force them to sell stocks at market bottoms to fund redemptions.
These reverse sentiments are well known to investment managers, many of whom bill themselves as “contrarians,” attempting to use public sentiment to guide them. Knowing that the stock market tends to do the opposite of public expectations is one thing, figuring out what the public believe is another.
Irrational peaks of exuberance or valleys of fear are more easily seen looking back. One was the dot-com bubble that peaked in 2000 with spectacular failures of many new Internet companies and valuations led by Cisco Systems which at one point reached over $555 billion, making it then the world’s most valuable company. (It’s $128 billion today.)
Fear ruled in 2008-2009 following failures of major financial institutions with the Dow losing 1,874 points in one week before bottoming at 6,469 on March 6, 2009. Beginning that September, I repeatedly reminded readers “panicked selling has never been a successful investment strategy.” The same is true of frenzied buying.
Neither is dominant today but it may be easier and certainly is more profitable if investors continue to follow a thoughtful strategy that emphasizes stocks in strong, growing companies. The June jobs report from the Labor Department just reported an unexpectedly robust surge in employment, showing that the Federal Reserve’s stimulus efforts are accelerating the economy.
Significantly, the Fed announced this week that it does not intend to use interest rates as a tool to avoid excesses in the financial system. It will rely primarily on regulation, a subtle policy change overlooked by the media amid the excitement of new market highs.
This policy change foretells a sustained environment of very low interest rates, smoothing the path for further stock market advances. Volatility, which has been low, will probably increase with time but investors should view price fluctuations as opportunities to augment their investments.
Industrial stocks are timely. Exaggerated fears about the pace of economic expansion slowed their pace earlier this quarter. Recent recommendations in this sector include BorgWarner (BWA-$66), Cummins (CMI-$157) and Westlake Chemical (WLK-$85).
Packaging Corp of America (PKG-$71) makes containerboard and corrugated packaging for the food, paper and agricultural markets. 2014 earnings are currently estimated at $4.60, up 40%. The company has a history of positive earnings surprises. Yield is 2.2%. Trinity Industries (TRN-$44) operates various businesses that provide products and services to the industrial, transportation, energy and construction sectors. Current estimates are for $3.75 earnings in 2014, up 60%. It also has a good record of positive earnings surprises. Yield is 0.9% with increases for the last three years.
“Rational exuberance” works. Best wishes for the Fourth of July.
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