News & Insights
Suspended By Optimism
We took a vote at Altavista and it was unanimous. 2009 was a better year than 2008. While we are sure this comes as no great revelation that we prefer a year when investments performed well compared to the worst year since the Great Depression, the mood around the office is surprisingly ambiguous after such a decisively positive year in stocks and bonds.
The Long and Short of it
The cause for our uncertainty relates to the unknown effects and timing of the inevitable unwinding of the very accommodative easy money policy stance of the Federal Reserve. It is clear that current inflation-adjusted short term interest rates below zero must rise; the question is when and to what extent. The Fed has kept long term rates artificially low through various exotic mechanisms unknown before 2008. The combination of extreme Fed accommodation and open ended U.S. Government spending has most investors preparing for higher rates. Stocks will be less attractive as interest rates rise and stocks are not particularly inexpensive as 2009 ends.
In March of this year the stocks of the S&P 500 were trading at the most attractive prices in over 15 years when measured by intrinsic value and a conservative view of their operating profits. Just nine months later, they are trading at values more characteristic of a boom than the fragile anemic economic growth we are experiencing. A rational investor who purchases the broad market at today’s prices needs to be an optimist.
Fortunately, there is some justification for optimism. Profits should bounce back strongly in 2010, fueled by increasing productivity and mildly improving employment data. Continued inventory stocking should help to improve the industrial production statistics beyond that which could be expected in a feeble economic expansion. In this environment, stocks could do better than expected.
In our view, it is too early in the recovery to move to an extremely defensive posture. Even though the stock market is fully priced, improving earnings and “animal spirits” can boost stocks for some time. We believe an emphasis on the stocks with the most predictable cash flows will serve investors well for the foreseeable future. These quality issues have done well during the last couple of months and we think that will continue. International stock markets were sharply up in 2009, and at these prices we would not be aggressive buyers, but believe emerging markets stocks are attractive for long term investors or on a pull back in prices. Bonds are up sharply, but with rising rates anticipated sometime this year we believe it will be tough for longer term bonds to hold their values. The broad commodities complex is attractive, but we think discriminating between energy, precious metals, industrial metals and agricultural products will become more important as 2010 proceeds.
The Altavista Investment Team-Winter 2010