News & Insights
Wheat, Chaff and the Sub-Prime Subplot
After 228 days without as much as a 2% pullback (the second longest streak since the 1950’s), the market stumbled dramatically on February 27th losing about 4% of its value. Many pundits and sages attributed this to the meltdown in the so-called “sub-prime” mortgage sector (loans to people with dodgy credit). While it may be true that this triggered the markets’ sell off, we question the implication that problems in the mortgage market will spill over into the broader economy and lead to recession.
Volatility in the market is a given. Ex-post facto analysis, while making for interesting conversation does little to inform decisions concerning the future of an investment portfolio. The sub-plot of increased foreclosures in the sub-prime market fits in with our notion of an economy that will slow down for the next several quarters. With robust employment, industrial activity and resource utilization it is difficult for us to see a recession on the horizon. Fear of a recession, however, may cause the market to be stormy, particularly when compared to the dead calm of the past year or two.
Stocks in general are reasonably priced and we believe the current drop in share prices makes the job of finding attractive investments easier. The recent volatility triggered by the sell off on February 27th, in our view, justifies an emphasis of large, higher quality companies which are perceived as good places to port in a storm.
These kinds of conditions tend to separate the wheat from the chaff (to use a tired old metaphor). In our view, stocks with cleaner balance sheets and steadier earnings will hold up quite well; however, it would not surprise us to see wider short term market swings than we have for the last two years. We believe that holding on through the volatility is preferable to attempting to time the market’s temporary pullbacks and rises.
Foreign Shares, Commodities & the Dollar
Developed Markets in Europe and Asia still offer good risk/reward characteristics and a full weighting in a portfolio. The emerging markets now offer perhaps the biggest opportunities of any major asset class, however with the capital markets’ now registering an increasingly volatile profile, we believe in being nimble when adding to positions here.
On the commodity front, rising oil prices seem underpinned with solid demand growth while spikes in prices of metals seem driven more by speculation. Still, exposure to commodities broadly provides benefits to a well-structured portfolio. We believe the dollar will continue its decline against the major currencies, bolstering the argument for international exposure.
The Altavista Investment Team – Spring 2007