The stock market advanced this month, with economic data being strong enough to leave investors more upbeat about the economy but weak enough to hold off rate hikes until sometime after June. It was choppy, however, as gains were limited due to a rise in bond yields, strength in the dollar, angst about the Fed’s eventual liftoff later this year, economic growth that is still halting, and the Greek cash crunch.
My outlook remains conservative, primarily due to high valuations. Such valuations have been supported by low interest rates and high profit margins, both of which have persisted for an unusually long length of time. The interest rate portion of the equation, in particular, is virtually unprecedented.
That being said, it is possible that the current environment will continue to enjoy these tailwinds for even longer. High profit margins mean that companies are doing well and that their continued efforts to keep costs down are paying off. If interest rates have been able to stay near zero for more than half of a decade, then they could possibly continue to defy expectations and stay there for a full decade. While I believe that it is more likely that events will unfold in a manner that is at least somewhat analogous with market history, my portfolio holdings would benefit greatly in the event of a continuation of this unique period (and I will also find more pockets of value in which to participate).
I was unable to identify any stocks worthy of initiating a new position in May. This often happens as my fund is intended to be low-turnover and long-term. I also maintain a large cash position that, while not ideal, leaves me well-prepared for the fact that “anything can happen anytime in markets” as Warren Buffett wrote in his most recent annual letter. Furthermore cash equips an investor “both financially and emotionally to play offense while others scramble for survival” as he wrote in his 2010 letter. My fund does not have to be fully invested. I am perfectly content to wait for the right opportunities, only buying great companies at attractive prices. While that may be a bull market headwind, it is an advantage over the course of a full cycle.
~~Michael Berlin can be contacted at email@example.com and at (631) 629-4928 .
The information included in this article is not intended to be used as a basis for making investment decisions nor should it be constructed as a recommendation to buy or sell any specific security. Consult your investment professional for additional information and guidance.