Investments

Looking to the Sky for Answers: Fall 2017 Commentary

In 150 A.D. the Greek philosopher Ptolemy published a book known as The Almagest which summarized the state of Greek astronomical knowledge, cataloguing the 1022 stars and 48 constellations known at that point. These constellations named by the Babylonians, Sumerians and Greeks helped them define the vast nighttime sky in a way that was useful for making judgments about navigation.

Within the economic firmament, relevant data points form a kind of constellation. Like old Greek sailors, investors attempt to discover a pattern or arrangement that provides guidance amid a vast torrent of data. Each investor arranges and interprets them based on their own experience and through their own prejudices.

For us, value is a polestar. At present, value provides only a dimming and twinkling light as stock prices climb ever higher. However, rising in the sky adjacent to value is the waxing light of two brighter stars: earnings growth and global economic expansion.

Normally when value is in decline, we look at the other stars in the constellation and observe a rising bear market (an Ursa Major). Fading value tends to beckon us toward the safe harbor of cash and bonds. However, with earnings and the world’s economy both ascendant, we are persuaded to keep a steady course.

Earnings for the companies comprising the S&P 500 have climbed at a double-digit pace since late last year, at least keeping pace with the improvement in stock prices over that time. We think this will continue into 2018.

Global and U.S. economic growth, which has been positive appears to be on even firmer ground as we begin the 4th quarter with consumer spending growing and even long dormant capital spending picking up. Supporting this positive economic growth case has been the firming of oil and other commodity prices.

With growth and profits brightening the investment sky, what about the flickering and fading
light from value? Today’s higher stock prices, while a concern, make sense amid the good news on earnings. Corporate tax cuts, which seem likely to be passed, provide another
justification of today’s higher than normal valuations. The arrangement of earnings, growth and value in the sky help provide the confidence to hold steady.

However, careful sailors do not just look to the sky, they look at the sea around them for potential trouble spots. Geopolitical risks like those raised by tensions with North Korea and
unexpected actions by the Federal Reserve could raise concerns. On balance, however, we advise steering straight ahead until morning.

We are grateful for the trust you have placed in Altavista and the relationships we have with each of you.  Enjoy the beautiful fall weather and we look forward to seeing you soon.

The Altavista Investment Team – Fall 2017

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