News & Insights
Protestant youngsters like me, attending Sunday school in the 70’s, were exposed to the story of King Agrippa, the Jewish king who attended the trial of St. Paul. Facing Roman justice, rather than defend himself Paul spoke compellingly and forcefully about his newfound faith. He was so effective and passionate that the king responded to Paul by saying “Almost thou persuadest me to be a Christian.” The lessons drawn from this tale were either about the tragedy of Agrippa, who just missed his chance or the witness of Paul who spoke bravely at his peril.
As a 13 year old schoolboy, one Monday, inspired by the example of Paul (and having failed to complete my math homework), I spoke passionately to my class and my teacher, inconveniently placed in the Agrippa role, about the joys of learning for learning’s sake without the artificial yoke of rote and legalistic exercises such as homework. Declaring my love of pure learning, I exhorted my teacher to do what he must to me but I could not in good conscience resign my spirit to the nightly godless ritual of solving mind-numbing quadratic equations. My excuse was so passionate and obtuse that he was persuaded to let me off the hook this one time and not count my uncompleted homework against me.
He regretted this decision in the coming weeks as Paul wannabes each made an impassioned defense of their failure to complete various assignments. The first two or three received mercy as I had, but to quell the growing anarchy each new “Paul” received the harsh judgment and consequences that a zero can do to a grade point average. The current stock market contains opportunities and risks akin to those faced by the boys inspired to follow my desperate example.
Since late 2008 when the market was in free-fall and continuing through its recovery, true believers in stocks have been exhorting investors to stay invested through the storm and buy stocks in its sunny aftermath. The average investor in stock mutual funds, however, has been a net seller of stocks throughout the market’s more than 100% turnaround. Since March of 2009, the market has traversed a path from being significantly undervalued to modestly overvalued, in our view.
History has shown this is likely a moment in a bull market when casual investors begin to listen to the clarion call of bullish voices from CNBC, the blogs and strategists and buy stocks. They are persuaded to listen to these voices because they regret missing out on the profits since the bottom and fear missing similar gains in the future. This typically takes the market from modestly to significantly overvalued. As much as 25% to 30% of the gains in a cyclical bull market happen in this last overvalued stage.
We remain in a mildly constructive view toward the market and believe the market could set another all time high above 1500 on the S&P 500 amid decent profits, an improving economy and better “animal spirits” over the next year to 18 months. Since the catalyst that will end this current bull market is unknown, we may strike an increasingly cautious tone in the next few quarters.
The Altavista Investment Team - Winter 2013