Taking Stock

Tony Crowell
Tony Crowell
September Songs

Stocks left behind slow summer trading on a run, entering September on sharply increased volume. The market left little doubt of its short-term momentum, scoring new highs above 17,000 on both the Dow Jones Industrial Average and above 2,000 on the S&P 500.

The U.S. economy supports these advances as its slow recovery from the financial crisis gains momentum. A new factory survey surprised economists, who had forecast a drop in manufacturing in August, with the best gain in over three years. This included a 1.8% increase in construction spending, also adding to expectations of faster growth. The Federal Reserve reported solid growth in all districts, noting increased consumer spending and scattered shortages of skilled workers but with few signs yet evident of broad-based wage growth.

This is doubtlessly one factor in persisting pessimism as reflected in a recent poll reporting 47% of Americans still believe we are in a recession, even though it ended more than five years ago. People looking for jobs are unlikely to be optimistic while those fortunate enough to be stock investors remain fearful after the 54% drop beginning in 2007.

The market bottomed on March 6, 2009 with the Dow Jones Industrials at 6,443. Three days earlier, newly inaugurated President Obama commented that stocks represented a “potentially good deal,” a remarkably accurate market forecast as the Dow then proceeded to gain 165%.

The market has generally done better under Democratic presidents than Republicans. From 1901 through 2013, the Dow gained 7.9 percent under Democrats versus 3 percent under Republicans. Midterm elections are almost upon us and market history reflects a tendency to rally no matter which party prevails.

The calendar rather than the outcome becomes even more historically significant as we move into 2015, the third year of the “four-year presidential stock cycle.” Inconclusive studies argue that this may be because all presidents try to manipulate the economy in advance of forthcoming elections. This is probably more entertaining than predictive, however, the Dow has gained during the third year of this cycle an average of 12.4 percent.

Currently, stocks have shown good staying power in view of unsettling news from Ukraine and the Middle East. European central banks are finally following the example of our Federal Reserve by unexpectedly lowering interest rates and initiating stimulus programs of buying asset-backed securities and bonds of Eurozone banks. Political uncertainties persist through forthcoming independence referenda in Scotland on September 18 and in Catalonia on November 11.

Overall U.S. stock valuations remain above average but far below historically dangerous valuations. Biotechs are always expensive but Biogen (BIIB-$334), a new buy, seems reasonably valued on expectations of future growth. The company dominates treatments for multiple sclerosis. Sadly, this disease typically requires chronic treatment for many years. Analysts estimate earnings for this year around $13, increasing to $16 and $22 in 2015 and 2016.

The belated pickup in construction spending is good news for Valspar (VAL-$80), another new buy. This Minnesota-based company, founded in 1805, makes paints and other products for both the consumer and industrial markets. It has posted five straight quarters of double-digit earnings growth with analysts estimating $4.12, up 16%, for fiscal 2014. Valspar recently acquired the manufacturing assets of Ace Hardware, which agreed to market Valspar-branded paints in its more than 4,000 retail stores. Valspar is global in reach with the No. 2 market share in Australia and No. 3 in China.

Apple (AAPL-$98) reports new products on September 9. Its usual stock price pattern is for hysterical herds of analysts to clamor that its latest innovations fail to meet their prior speculations, knocking the stock price down for a few weeks. The company is unique in size, market share, financial strength and historical innovations. Patient accumulation of its stock will prove rewarding, as will that of almost all growing blue chip companies.



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




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