Streetwise for Friday, October 6, 2017

The string of record closing highs for the three major equity indexes has investors asking, “Is it time to sell? Should I move to the sidelines?”

Is there some cast in stone rule that says when the markets reach a certain level that a so-called correction in imminent? Of course not. Furthermore, a year or two from now the current market levels could easily be viewed as missed buying opportunities.

So, do I believe that the likelihood of the stock market gaining altitude over the next several months is greater than the probability of the reverse happening? Absolutely and the reason is the economy.

Share prices increase when companies add to their retained. The critical factor underlying those increases is an expanding economy.

Manufacturing activity hit a 13-1/2-year high in September. The Institute for Supply Management (ISM) survey released this past Monday, emphasized the economy’s underlying momentum, noting that factories reported stronger order growth last month. One measure of factory employment hit its highest level since 2011.

The ISM said its index of national factory activity surged to a reading of 60.8 last month, the highest reading since May 2004. A reading above 50 indicates an expansion in manufacturing, and manufacturing accounts for 12 percent of the economy. The ISM also indicated that its measure of factory employment increased 0.4 point to 60.3, the highest since June 2011.

The Commerce Department announced that construction spending rose 0.5 percent last month and 2.5 percent on a year-over-year basis.

Third-quarter earnings for those companies making up the S&P 500 index are expected to have increased 5.5 percent from a year earlier, according to Thomson Reuters research, after rising a stronger-than-expected 12.3 percent in the second quarter.

Do not allow yourself to be caught up in what is best described as herd mentality. Distance yourself from all the noise of what might be, could be, or should be. Those who succumb to the negative rhetoric will miss great buying opportunities. And that is no way to manage a portfolio.

Yes, if you listen to the naysayers long enough the urge to rush for the exits may become irresistible. The icy panic that grips you at the thought of your profits evaporating can be overwhelming. Investing is not always easy on the psyche.

Here is some advice: When you are fortunate enough to be passed a cookie tray, always grab a few cookies because you do not know when it will come around again. At the same time, you should always remain vigilant and cautious.

More importantly never let others, particularly those who stand to make a commission, press you into selling off solid blue-chip stocks simply because of what appears to be a temporary 5 to 10 percent price decline. Remember, a “low turnover portfolio” is the antithesis of brokerage industry philosophy.

Peter Lynch, former manager of the Fidelity Magellan Fund, in his book “One Up on Wall Street,” writes, “When you have found the right stock and bought it and all the evidence says it’s going higher then it’s a shame to sell.”

Lynch goes on to point out that yes, you do have to be on the lookout for deteriorating management, an upward cost spiral with inadequate controls, increased competition, or a lack of innovation.

Nonetheless, investors seem to have this overwhelming desire to continually interact with their portfolio. Succumbing to this trait is like taking a stroll down the center of a busy highway. It is only a matter of time before you are run-over.

Heed the words of the great Benjamin Graham, author of “The Intelligent Investor.” Note: If you have not read this book, get a copy and read it before making another investment decision.

Graham suggests you put your money into two accounts. The first account has 95 percent of your portfolio and you invest it following the ideas of Buffett, Graham, et al. The other 10 percent you trade to your heart’s content…until it’s all gone.

Lauren Rudd is a financial writer and columnist. You can write to him at LVERudd@aol.com. Phone calls accepted between 9 AM and 3 PM at (941) 706-3449. For back columns please go to www.RuddReport.com.