The stock market’s recent negative action continued into September, driven by global economic deterioration that is particularly highlighted by China, the world’s second largest economy. While China’s previous rapid growth rate is unlikely to return, it is important to recognize that China is still growing and its ascent into a more industrialized economy is here to stay. Nevertheless the world must readjust and that process can be painful for some time, especially in light of deflating bubbles there.
Meanwhile, during September the Federal Reserve delayed its initial rate hike. Rather than exciting the market, this decision instead seemed to unnerve investors. If the Fed had finally begun the interest rate normalization process, it could have at least removed one piece of uncertainty from the current investment climate. In addition, there perhaps is the feeling that the Fed waited too long and missed many opportunities to raise rates from rock bottom levels during a long and steady economic expansion, albeit slow and unexciting. Now the Fed very well may be raising rates into oncoming economic weakness.
I continue to find the market unappealing on an aggregate basis. The most reliable broad valuation measures continue to show an overvalued market that has only become slightly cheaper as a result of a rather shallow decline thus far (compared to other declines that have occurred off of similar valuation levels in the past). In addition, investor risk appetite seems to have vanished. Tempering this concern is the fact that interest rates remain extraordinarily low. Indeed relative attractiveness in this low rate environment is part of the reason that I consider the 23 stocks that my fund owns to be very sound investments.
This month I re-purchased Exxon Mobil 19% lower than the price at which I sold it profitably in January. I believe that Exxon is uniquely positioned to prosper from the greater energy sector’s pain, but I am keeping it smaller at 3% instead of the previous 5% position size. In addition I sold DuPont and Norfolk Southern due to a re-evaluation of just how challenged their businesses are.
My portfolio is comprised of the following stocks in size order – Apple, Microsoft, Exxon, Johnson & Johnson, Berkshire Hathaway, Wells Fargo, JPMorgan Chase, Pfizer, Merck, Intel, Cisco, Wal-Mart, 3M, Qualcomm, Union Pacific, Boeing, United Technologies, MetLife, Texas Instruments, Dow Chemical, Hewlett-Packard, Raytheon and Emerson Electric. Position sizes range from 4% to less than 1% and total exposure is 46%. Virtually all of my fund’s holdings are major, blue chip, dividend-paying companies with stable earnings and healthy balance sheets.
~~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.