The investment process does not stop after the initial purchase is made, but rather is ongoing, completed at the end of the holding period, be it several months or several decades. We agree with the legendary manager of the Fidelity Magellan Fund Peter Lynch who stated that “if you’re prepared to invest in a company, then you ought to be able to explain why in simple language that a fifth grader could understand, and quickly enough so that a fifth grader won’t get bored.” To that we would add you need a reason to make an investment, a reason to hold that investment and a reason why you would make a sale of that investment. Furthermore, the reasons to hold and sell must continually be evaluated and measured against other potential investment opportunities.
Investors should always be trying to upgrade their portfolios. Maintain a stable of possible choices that, for the right reasons and at the right price, you would like to purchase. In addition, periodically rank your current holdings from most to least attractive and jettison one of your holdings for one that you believe has more potential. As a reminder, you must all the while maintain the appropriate asset allocation for your objectives.
Why, when nearly seventy-five percent of the companies that have thus far reported earnings this past quarter that have surpassed the consensus estimate of Wall Street analysts, has the market not responded favorably? There are many reasons, not the least of which being the fact that there are “many” reasons. However, we will focus on what we believe are the four most important.
Speaking on a conference call, Caterpillar Chief Financial Officer Brad Halverson, when describing first quarter adjusted earnings per share, observed that the quarter may just be the “high water mark” for the year. Investors responded to this statement by punishing Caterpillar along with other global industrial stocks. In fact, it raised the question as to whether or not this is this as good as it gets for earnings in general and therefore perhaps for the stock market. Although historically, when the pace of the growth in earnings peaks it is sometimes been accompanied by a correction, it has not ushered in the ultimate end of a bull market.
A second change in the financial environment that has spooked the stock market has been the twenty-five percent rise in the yield on the 10-year U.S. Treasury Note from 2.40 percent at the end of calendar year 2017 to 3.02 percent recently, making them more attractive. In addition, yields on short-term money markets and treasuries have also risen precipitously in absolute terms. However, relative to yields prior to the Great Recession, interest rates still remain low which we think will ultimately keep the majority of long-term investors in equities.
The third concern that investors are wrestling with is the potential for the trade skirmish to turn into a full blown war. This is a real concern as the end game is not yet known nor can it be quantified. As noted two months ago we believe renegotiating trade pacts are productive first steps rather than imposing tariffs which will increase the cost of doing business, a cost that will be transferred to the consumer thereby negatively impacting the economy of the United States.
The final headwind to investors is the age of this bull market. Although bull markets do not die of old age, many investors acutely remember the pain of the bear market in 2008, early 2009 and do not wish to go there again. They are skittish, keeping their fingers firmly on the sell button at any sign of market turmoil which, we believe will ultimately be costly in the form of lost gains.
We do not believe that we have seen the ultimate top of this secular bull market and are of the opinion that stocks will make new highs by the end of this calendar year, most likely during the latter part of the fourth quarter. However, we also do not believe that this period of churning will end anytime soon.
Please note that all data is for general information purposes only and not meant as specific recommendations. The opinions of the authors are not a recommendation to buy or sell the stock, bond market or any security contained therein. Securities contain risks and fluctuations in principal will occur. Please research any investment thoroughly prior to committing money or consult with your financial advisor. Please note that Fagan Associates, Inc. or related persons buy or sell for itself securities that it also recommends to clients. Consult with your financial advisor prior to making any changes to your portfolio. To contact Fagan Associates, Please call (518) 279-1044.
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