News & Insights
Putting on a Brave Face
Investors are demonstrating remarkable fearlessness and calm in the face of high energy prices, rising short-term rates and a slowing economy. We believe that investors may be a little too complacent and are beginning to adopt, as we have for most of this year, a more defensive stance. As of the close of business on September 30th, the S&P 500 was positive by 1.39%, less than cash and bonds, and so our conservative stance seems somewhat justified at this point in the year.
In our view, there is too much faith being placed in the ability of mortgaged American consumers to spend at the torrid rates of the past few years. If consumers slow down and begin to (heaven forbid) save some of their income, the profit outlook for the consumer sectors of the market will probably decline. On the other hand, corporate capital spending continues at a fairly robust pace. Corporate margins and earnings are at generational highs, and consequently there is more room to disappoint investors with lower profits, rather than surprise them with more good news.
In the face of this incipient slowdown, the Fed is continuing its tightening cycle, which has negative implications for equities. The environment for stocks should improve when Greenspan & Co. cease raising rates. While holding more cash than usual, we will emphasize high-quality, dividend paying U.S. shares and stay fully exposed to foreign markets.
Bubble or not, real estate is richly valued and may be vulnerable to an economic slowdown and rising mortgage rates. Due to inflation fears and rising international demand, commodities and natural resources have provided excellent returns over the past few years, and we see no reason why they should not continue to provide competitive returns when compared to stocks.
In summary, we are preparing for a sloppy few months in the market. Once the Fed signals that it has finished its tightening cycle, then a more aggressive stance may be warranted. Bullishness, our preferred mode, in the face of current conditions seems more like bluster than advice. Enlightened caution is the order of the day.
The Altavista Investment Team-Autumn 2005