The Band Plays On
In October, the stock market achieved a remarkable reversal to the upside. It is now moving toward new highs like a soprano repeating curtain calls to continuing applause. Investors are a less forgiving audience and many now fret whether the next performances will succeed. While there are never any guarantees in this business, market history confirms a number of factors that argue for further advances.
Stocks are entering their strongest seasonal pattern for gains. The best three-month stretch for stocks over the last 100 years has been the period from November through January. The Dow Jones Industrial Average consistently gained during this stretch, averaging a 1.5% gain during December alone. Since 1928, when data became available for the broader S&P 500, that average rose an average 3.5% for the full three-month period.
This seasonal trend coincides with our entry into the third year of a presidential election cycle. Since 1960, the third year of each president’s term has shown positive stock market returns. In nine of these thirteen such years, the returns exceeded 10%. Proponents of this theory argue that presidents take steps to stimulate the economy, hoping to enhance their party’s forthcoming election prospects.
The year-end months are when many companies record their biggest sales through consumer holiday spending and business capital expenditures. Early retail sales indications are positive, good news for FedEx (FDX-$171 and Simon Property Group (SPG-$180). Simon is capably addressing the challenges of online shopping to its malls by rebranding itself toward higher-quality premium spaces. It yields 2.8% with increases for the last three years.
Nike, Inc. (NKE-$94) is a new buy recommendation. This well-known company offers products in eight categories under the NIKE and Jordan brand names. With over $30 billion annual sales, it has come a long way since two runners founded it with $1,200 in the bank, making their shoes with grooved soles on a waffle iron. Earnings are growing at more than 15% and will be around $3.60 for its May fiscal year, up 20%.
With most companies having reported third quarter earnings, 74% report solid growth, beating analysts’ estimates. Some of these “surprises’ reflect prior nervous downgrading of estimates but the overall trend is clearly up. So is the economy. Third-quarter GDP expanded 3.5% and a 3% growth rate should prevail through 2015. The unemployment rate continues to decline, hitting 5.9% in September. Unfortunately, this has not yet translated into wage gains but accelerating growth will help.
Earnings announcements are supporting our stocks, Qualcomm being a marked exception. The company disappointed on both current results and forward guidance. Even worse, it revealed that it is dealing with regulatory investigations in China, the U.S. and Europe, implying breaches of ethics that will taint its reputation. I sold our positions.
Happily, positive earnings surprises are boosting our portfolio stocks. Those already ringing the bell include Actavis (ACT-$252), Alibaba (BABA-$109), Amgen (AMGN-$116), Apple (AAPL-$108), Biogen (BIIB-$322), Celanese (CE-$59), Celgene (CELG-$59), Jazz Pharm. (JAZZ-$171), Novo-Nordisk (NVO-$43), Tesla (TSLA-$241), Taiwan Semiconductor (TSM-$21, Union Pacific (UNP-$119) and Visa (V-$250). Declining energy prices have been punishing oil and gas companies, thus Canadian Natural Resources (CNQ-$34) and EOG (EOG-$98) particularly stand out for their positive earnings surprises.
All these are buys. Other buys in anticipation of favorable earnings reports by the end of the month include Applied Materials (AMAT-$22), Disney (DIS-$91), Palo Alto Networks (PANW-$105) and Valspar (VAL-$83). The stock market appears to be making early preparations for Thanksgiving.
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