Low Pump Prices Pump Up Shoppers
Sliding oil prices greased the skids for the largest stock market decline in two months. Media commentators sounded their usual tocsins of doom, continuing their practices of attracting followers through useless and inaccurate predictions. The Danish physicist Neils Bohr said, “Prediction is very difficult, especially about the future.” Oil prices now down 43% from the summer in defiance of almost all recent predictions, yet the predictors continue to predict.
It is their nature, just as the nature of markets is to fluctuate. Financial news focused on the recent market skid ignores the numerous dips in 4%-7% ranges over the last few years, none of them of lasting effect. In fact, even after the oil price dip, the S&P 500 Average is up 11% so far this year.
After double-digit gains last year and the year before, this sustained performance probably induced some investors into complacency. Like parents of small children, investors must remember that quiet periods are not signals to relax. Both groups need disciplined perspectives and continuing vigilance.
The biggest investment hazard is slowing growth. Europe is tottering on the edge of recession and China’s explosive growth rate is receding. U.S. growth rates hit 3% in recent quarters but anticipation of slack developing is already producing news of reduced production and capital investment.
Even though the U.S. has rebounded strongly, the recovery has been uneven. A recent poll shows a decline since 2009 from 72% to 64% of Americans still believing that hard work could result in riches. Corporate profits are at record highs but wage growth is anemic.
The decline in oil prices reflects a global decrease in demand as well as increasing supplies from shale production. Prices at the gas pump are well below $3 per gallon in most states and even below $2 in some. This provides an artificial wage increase, boosting retail sales.
Prospective interest rate increases, once the dominant baton for stock market rhythms, have retreated until sometime next year. The Federal Reserve is highly unlikely to let rates loose in the absence of vigorous growth.
Congress behaves less rationally than the Fed but appears to have avoided blunders for the moment. Political grandstanding will cause some volatility but will not derail the markets. After all, they survived the sovereign debt crisis in 2011, the fiscal cliff in 2012 and the government shutdown in 2013.
Unsurprisingly, energy stocks are the worst performing sector of 2014. Medical, particularly advanced biomedical, and technology stocks have led. Shire (SHPG-$213) has made back much of the dip that followed cancellation of its buyout. Celgene (CELG-$117) has a strong pipeline. It’s pricey but its historic and projected growth rates over 25% justify premium pricing.
Housing markets are restrained with price appreciation and turnover slowing despite low mortgage rates. These might pick up in the spring and Lennar (LEN-$43) is already showing earnings growth over 20% with a P/E ratio of 20.
TriNet (TNET-$30), a new buy in the mid-cap range, provides outsourced human resources services to small and medium-sized businesses. These include payroll, health insurance, retirement plans and employment law compliance. This is a relatively new company with a well-connected Board that has been posting solid earnings.
Sales for 2014 will exceed $500 million, up over 20%. Earnings will be $1.10 to $1.15 with estimates for next year around $1.40 per share. The company provides a bundled package of human resources services that are being welcomed by a variety of businesses.
Overall, the market seems to be regaining its footing after a brief sell-off sparked by the uncertainties rising from oil price fluctuations. Investors are adapting and accepting, thus positioning stocks for another run to new highs, probably before the New Year.
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