‘Tis The Season
Like a vanishing Halloween ghost, the Federal Reserve ended the tapering of its bond-buying program, at least for the time being. As the Fed announced last month that it intended to end the program this month, the news should not have been surprising although Wall Street seemed shocked and sold off briefly. This program is only one of the tools available to the Fed and it reaffirmed its assurance that short-term rates would remain near zero for a “considerable time.”
Since the Fed initiated this program, the jobless rate is down from 8.1% to 5.9% and the U.S. economy grew during the third quarter at 3.5%. These trends have resulted in the highest consumer confidence index since October 2007. This is particularly significant as we approach the critical holiday retail season. Consumers account for around two thirds of the U.S. economy and solid increases in consumer demand would further boost the overall economy.
Despite media and political critics, the Fed’s bond buying program, sometimes called “Quantitative Easing” or “QE” has been effective. Inflation has remained constant at a 1.5% rate since September 2012. Meanwhile, the dollar has strengthened at almost a 7% rate compared to the world’s other currencies.
Lower gas prices are contributing to a pickup in consumer spending. The U.S., already the world’s largest energy consumer, is well on its way to becoming the largest oil producer. Its growing shale production contributes to the current oil price decline to $80-$85 a barrel, down nearly 30% from over $115 in June. Lower energy prices are a somewhat mixed blessing as the oil and gas industry makes up 11% of the U.S. economy but the lower prices at the pump will be timely stimulants to consumer spending.
Marginal energy producers may struggle in this price environment but stronger companies will prosper. EOG Resources (EOG-$91) is a Dallas-based global oil and gas exploration company with $17 billion sales. Its technological developments have positioned it as a forerunner in shale energy production, leading to its recent rank as the leading crude oil producer in Texas and the lower 48. It also has smaller operations in Trinidad and Tobago, Canada and other areas.
EOG’s third quarter earnings will be reported on November 4 with analysts expecting a 12% increase. This will give a better look at earnings for the full year, currently seen at $5.45. Its stock yields only 0.7%, however, the company has raised its dividend for 14 straight years, a record that commends it for retirement accounts.
Early forecasts for the holiday shopping season are encouraging. The Postal Service expects a 14% surge in holiday deliveries with similar growth for the package delivery companies. United Parcel Service (UPS-$103) and FedEx (FDX-$166) should both enjoy record peak holiday seasons, spurred by increasing online consumer sales. Lower fuel prices will boost profits for both companies.
With some exceptions, earnings reports continue to support further market advances. Biotech is particularly strong, led by Amgen (AMGN-$161), Biogen (BIIB-$322) and Celgene (CELG-$107).
Visa (V-$237) blew through estimates with a 17% earnings increase. China eased some restrictions on credit card activities. Apple’s new “Apple Pay,” which incorporates credit cards will also benefit Visa. Typical of most things introduced by Apple (APPL-$107, this innovation is enjoying rapid adoption.
Earlier this month, the stock market was off a steep 7% in one month. Barring an unusual decline as we finish the month, it will have reversed to a profit for the month. This is an unusual occurrence, having taken place during only 15 months since 1900. Such a swing shows a strong increase toward positive investor attitudes. October has frequently hatched market bottoms while the last two months of the year are characteristically strong.
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