News & Insights
The Economy, Investments and the Virtues of Neglected Assets
Since 2002, the backdrop of the economy and the markets has been dominated by two factors: the expansionist policies pursued by our government responding in the wake of September 11th, and the bursting of the growth stock bubble in March 2000. Our Federal Reserve Bank lowered rates and expanded the money supply, while Congress and the Bush administration lowered taxes, spent money and exhorted us to purchase consumer goods as an act of patriotism. Americans hardly need encouragement on this last point, but redoubled their efforts and sent iPods flying off of the shelves and cars rolling out of factories.
Those with funds to invest eschewed the disgraced U.S. stock market and put their money in commodities, foreign shares, dodgy small companies and most emphatically, real estate. These past four years have been fabulous times to invest in almost everything --except blue chip U.S. stocks.
The backdrop has changed dramatically in 2006. Concerns about inflation and the hangover of the recent “easy money” era have replaced the legitimate concerns that caused our leaders to apply the policies of the last few years. The results of the transition are beginning to be clearer. First, a significant slowdown in the housing sector, coming off of a decade-long boom has triggered a consumer slowdown. With consumer spending generating about two-thirds of the economic output of our country, this is significant. Secondly, business spending is increasing, but nothing like the rate of the consumer slowdown. To us, this adds up to an economy that, while avoiding recession, will put in several quarters of sub-par growth, taking the allure off some investments that do well in a hot economy, such as commodities, energy and transportation companies.
Under these conditions, it appears that the neglected asset class at the end of this expansionist era is approximately the same as the class that led the last U.S. stock boom: high quality large U.S. equities. The fifty largest companies in the S&P 500 trade at 19 times trailing (last year’s) earnings, a discount to the broad S&P of some 6 %. The fifty largest stocks have historically traded at a 15%-20% premium to the broad universe. A flight to quality during this slowdown should support the prices of these corporate titans.
The Altavista Investment Team – Autumn 200