The Rally Of Summer
For the third time in the past twelve months, the stock market slid into a downtrend and then, after dipping around five percent, rallied and resumed a confirmed uptrend. It’s like contemporary swimming pools with a maximum depth of five feet, making it easier to avoid getting in over your head.
The stock market has a history of sporadically getting investors in over their heads, most recently in the financial crisis of 2007-2008 and the “dot.com” exuberance of 2000. These periods, like other market tops, took place as investor euphoria soared to levels of excessive exuberance that took stock prices to absurd levels.
Cisco (CSCO-$24), one of the sounder stocks that took flight, is now selling at a third of its 2000 price peak, when its market cap made it (briefly) the world’s most valuable company. Countrywide Financial peaked at $47 in 2007, before hapless Bank of America bought it for $7 a share, its CEO Kenneth Lewis, billing this as “a rare opportunity” at “an attractive price.
Mr. Lewis, who also dragged Merrill Lynch into the B of A stable, was forced into “retirement” in 2009, commenting that these two acquisitions were “on track and returning value already.” Really? Between 2004 and 2008, B of A sold almost a trillion dollars of bad mortgage bonds. It recently agreed with the Justice Department to pay $17 billion, a record fine, after already paying $60 billion in fines.
Bank of America (BOA-$15) hit an all-time high of $55 before the financial crisis and then fell below $5 in 2011. It may be a “bargain” at today’s levels but is far removed from my recommendations of sound companies with rising earnings and solid prospects.
Oddly, I receive many casual inquiries about this company as well as other “household names” like General Motors, Yahoo or Wal-Mart. These may have merits but are often overvalued by casual investors, who are influenced by current news stories, take comfort in familiar names, obsess over short-term stock price movements and scrupulously track the prices they paid, a factor unlikely to affect the financial results of any stock.
Some of my recommendations include familiar companies like Apple (AAPL-$97), Disney (DIS-$88), Intel (INTC-$33) and Union Pacific (UNP-$101). Less familiar names include Blackstone (BX-$33), Ecolab (ECL-$111), Illumina (ILMN-$167), Jazz Pharm. (JAZZ-$144), Novo-Nordisk (NVO-$44), Shire (SHPG-$242) and Trinity Ind. (TRN-$44).
All of these qualify as large-cap stocks and I continue to recommend that investors ballast their portfolios with a solid weighting toward these larger companies. Stock trends develop momentum and the recent rally is holding near its highs. This is despite headline worries about Ukraine and the Middle East together with murky economic news from Europe and China. That’s strong evidence that buying strength is developing and should sustain the uptrend for now.
Inflation is under control and interest rates remain low even though each bit of good news brings fresh media alarms that rates will be higher at some point. That is inevitable and has been forecast with remarkable uniformity for the past year. At some point, the Federal Reserve will tighten; presently, their policies are favorable for stocks.
I think the averages could hit yearend targets of 18,000 on the Dow Jones and 2,100 on the S&P 500. While retail sales are soft and housing has yet to get going again, overall corporate earnings set records and are likely to repeat for this third quarter.
There will doubtlessly be more dips by yearend. I suggest investors shake a few reefs out of their sales and consider buying some more aggressive additions during the next downturn. New candidates include Skyworks Solutions (SWKS-$53), AmerisourceBergen (ABC-$76), Anadarko Petroleum (APC-$105) and Arris Group (ARRS-$31). Meanwhile, enjoy the rally and these last lazy days of summer
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