News & Insights
During the first quarter the U.S. stock market shook off the hesitancy displayed since October of last year and moved ahead decisively, closing out the quarter about 5% above its value at the end of December. Investors’ risk appetites that had been flagging since the fall, jumped back to life impelling such volatile asset classes as emerging market stocks, high yield bonds and commodities higher. Confidence is building that the economy is on a sustainable growth path, with manufacturing activity picking up and employment beginning to stabilize. The calamity of late 2008 is receding into memory.
We believe this is all well and good and in the main, share the markets’ ebullient mood, at least as it relates to its fortunes over the next 6 to 9 months. There are a few good reasons to believe in stocks at the moment and the most relavant of these are related to profits. The table is set for companies to report strongly rebounding earnings, since final demand has stabilized as firms have shed excessive costs. While the dramatic 70% rise in the stock market in the past year discounts much of the improvement in earnings, we believe the market will continue rising in the next few months as the skeptics who for the past 18 months steered clear of stocks, begin to buy in. So while returns may be muted they should remain positive.
Tempering this generally positive outlook are the unknown consequences of several looming macro issues. First, the U.S. government’s role in sustaining the economy is uncomfortably high. A great deal of modest improvement in the retail sector can be accounted for by a strong increase in government payments to unemployed workers and unprecedented stimulus spending. Private credit is actually contracting. The government has been financing its greater role in the economy with the issuance of Treasury debt, which up until now has been gobbled up by central banks, private investors and our trading partners overseas, allowing Uncle Sam to borrow at attractive rates. This fortunate state of affairs looks increasingly unsustainable.
Our most notable trading partner, the Peoples Republic of China, is a big purchaser of those bonds. While flying high at the moment, the Chinese Communists (how we used to refer to them before we owed them so much money) are likely to experience some turbulence, as their economy adjusts to a changing mix of imports and exports. To us it seems like wishful thinking to believe their necessary economic adjustments will be executed without consequence to themselves and their trading partners. We think these effects will be manifested in higher interest rates in the U.S. If we sense we are headed for such a “Shanghai Surprise”, we will adopt a more defensive position.
The Altavista Investment Team - Spring 2010