News & Insights
The Next Act
Since last quarter, the stock market recovered smartly from the mild selloff in June triggered by discussion of tapering the Federal Reserve’s program of bond purchases or “QE.” After adjusting to the over 40% rise in the yield of the10 year Treasury bond, the market has reset expectations and rallied over 3% in September, touching new nominal highs during the month.
As we indicated last quarter, we believe U.S. stock prices are stretched and the upside for the broad market is uninspiring at these levels. Over the past three years stock prices have surged due to rapidly improving profits and buoyant liquidity provided by the Fed. We believe profit growth and buoyant monetary policy have crested and will provide less support in the coming quarters.
During the past three years the rise in the stock market has not been matched by comparable improvement in the “real” economy and we believe this is set to change over the next several quarters. Economic leading indicators are turning decidedly upward and our trading partners in Europe and Asia appear to be on the mend as they have embraced “easy money” policies following the lead of our central bank. To us this means that global economic growth is set to accelerate in 2014.
For investors the present constellation of facts presents few clear opportunities but there are factors worth exploiting. For long term investors, taking some profits out of richly valued U.S. stocks and recycling those funds into more modestly priced European and emerging markets shares should enhance returns over the next several quarters.
We believe the chance of a mild to moderate market correction has risen due to changing policy. In that event, holding a higher than average position in cash and money market funds will provide “dry powder” to deploy into the market at lower prices and cushion any volatility.
On the fixed income front, we believe the big move up in rates since last summer has taken much of the overvaluation out of the bond market. Rates will likely move higher in 2014 but will likely remain range bound for the next several quarters.
The combination of toxic politics in Washington and changing policy at the central bank are cause for near term caution but accelerating economic growth next year leads to our cautious but constructive outlook.
The Altavista Investment Team – Fall 2013