The stock market had a tumultuous month, alternating between worry and relief. Volatility was driven by a stream of headlines from Greece and China, as well as second quarter earnings season. Just as the Greek crisis was temporarily “resolved” through another bailout (ironically more stringent than the one that it had originally refused), the Chinese stock market crashed. While China is a very different market than that of the United States, contagion fears were stirred as the Chinese and US/global economies are extremely interconnected. Corporate earnings were more positive than negative, but top line sales were challenged and currency headwinds continued to be a theme.
The one other major factor looming over the market is the expected rate hike most likely later this year. This event will end a seven-year policy of zero percent short-term interest rates and will also constitute the first rate hike in nearly a decade. One of the key drivers of the market over the last several years has been the extraordinarily low interest rate environment. If we are truly on the precipice of higher rates, then there exists legitimate cause for concern on this front. On the other hand, interest rates are extremely challenging to forecast accurately (even with the Fed telegraphing its moves) and lately long-term rates have actually been declining. Furthermore the last time the Fed began a tightening cycle – 2004 – the market continued to rally meaningfully for another three-plus years. With this discussion as a backdrop, I prefer to accept current interest rates rather than incorporating an unreliable forecast into my analysis. This approach mirrors my method for commodity prices that led to good exit prices in my fund’s oil stocks.
I have long emphasized a commitment to both low valuations and high quality in terms of my stock selection process. Over the years this dual commitment has led to some excellent investments, but it has also resulted in fewer holdings and excess cash. Going forward I intend to loosen my valuation standards a bit, though I will not sacrifice on quality. As Warren Buffett has said, “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” This discussion should certainly not be construed, however, as an abandonment of my value investing principles in any way whatsoever.
~~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.