Seven straight months of stock market advances do not seem to have restored much faith by the investing public in stocks. This is understandable after a market plunge of 53% from October a year ago until March of this year. Even with the strong rally of the last six months, stocks are still down 32% from their peak.
Stock market professionals know that the market has reliably rebounded after dips that challenged everyone’s confidence. In October of 1987, it fell 23% in one day, still the largest single-day percentage drop. Fifteen months later, it made that up and ten years later, it had quadrupled.
Beginning in 2000 with the collapse of the dot.com bubble, the stock market suffered three straight years of double-digit losses led down by terrorist attacks and a nasty recession. Tech stocks suffered the most but no one predicted a second Great Depression and stocks were back up 23% in 2003 as they began a new five-year run to new highs.
This time, people remain fearful with record amounts held in pitifully low yielding cash accounts. One reason for these fears comes from increased public participation in stocks through 401(k) and other retirement plans. With overconfident projections of future growth knocked askew by almost unprecedented market swings, many are now belatedly shifting to cash and bonds.
Even though the recession is ending, weak recovery in employment, housing and consumer spending make holding some cash and bonds sensible even though the historical record favors an even higher stock market in 2010. There are concerns from trade issues that might develop from the recent tariffs on tires from China and the debate, to define it charitably, on attempts to reform the costs of health care is unsettling but the overall picture is improving.
An improving economy normally brings superior price performance to stocks in smaller companies but I continue to favor the greater stability of large cap stocks until the seas are less choppy. The beaten up financial sector now seems likely to resume some degree next year of its former leadership. JP Morgan Chase (JPM-$45 on 9/22) has weathered the storm as the strongest bank in he country. It has over $2 trillion in assets and more than 200,000 employees working in over 60 countries.
Recent additions include Washington Mutual and the late Bear Stearns. These added to its large pile of assets needing much attention for ultimate disposition but its burden provides proportionately less stress than those of Wells Fargo or Bank of America. Even this big bank is still in recovery and earnings will not rebound until to 2010 when they should be at least $3.00 a share. It reduced its quarterly dividend to an embarrassing nickel but promised an increase next year.
Vodafone (VOD-$23) is a large ($66 billion sales) English-based wireless communications company. It is strong in Europe and emerging markets, where sales are off under recession pressures as customers there typically buy minutes in bulk, rather than the U.S. and European monthly plans. It owns 45% of Verizon Wireless, the largest U.S. wireless network.
Verizon, which I sold over concerns for the costs of its landline network, owns the other 55%. Vodafone is selling at its book value, Verizon at twice book. Vodafone, another large company that will benefit with global economic recovery, is quite reasonably valued and yields 6.8%.
CareFusion (CFN-$22), a recent IPO, is smaller but has the backing of Cardinal Health, its former corporate parent. It is a medical technology company whose products make hospitals more efficient with intravenous medications. Its growth is promising, its valuation reasonable.
Among our bigger growth favorites, Apple (AAPL-$184) and Amazon (AMZN-$94) both seem poised to break through the next “hundred” price level. Google (GOOG-$501) just did.
