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Portfolio strategy update CURRENT MARKET NEWS
Editor’s Note: The following portfolio update is from David Gottstein’s monthly Dynamic Research Group’s newsletter. It was compiled in February. The Energizer economy keeps going and going
It’s hard to imagine living in a better time. The advances that are taking place in medicine and technology, the quest for peace in historically volatile places such as the Middle East, Ireland and Eastern Europe, and the general prosperity that has moved across our land are almost too good to be true.
Even though millions are still suffering from poverty in our country alone, the opportunity to make great strides stands before us with the hope of real possibility. It seems we are living in a truly golden age. Can it all be real?
We think it’s possible.
Our society as a whole is reaching a point of collective synergistic growth in a manner comparable to impoverished families that overcome adversity and make it to the middle class through hard work, education, investment and savings. We can focus on and risk pieces of the future as we never have before, without having to worry about where our next meal is coming from.
Capitalist economies allow our society to allocate scarce resources in an optimal fashion. We’ve been so successful in this endeavor that the surpluses of our activities allow us to forecast paying off the national debt within the next 10 to 15 years. The real benefit of this single action alone will be that profits can be used to invest in a better tomorrow rather than pay for our past consumption.
As near this reality, our ability to move forward will further accelerate. We mention this because of the growing concern by some that we’re at the very dangerous point of economic and stock market-priced bubble. We disagree, and believe the opportunities for investors still remain strong, especially if one is selective.
The market as we see it Earnings for the fourth quarter of 1999 are coming in very strong again. They are showing a 15- to 20- percent gain over the previous year both aggregately and for the average stock.
Very few losses are being reported. Interest rates may rise somewhat looking forward as the Fed tries to slow the economy down, but they won’t guide us into a recession. Thus, earnings should continue to grow.
If we’re right about the national debt, the government will end its tradition of squeezing capital resources away from the private sector, boding well for interest rates long-term. Much of this is happening because of the tremendous productivity enhancements made possible by the technology revolution unfolding in front of us, with literally no end in sight.
What this means in the intermediate and long-term is that fair values should continue to rise in the stock market.
Come on in, the water’s fine With this backdrop in mind, we are raising our asset allocation for invested stocks this month to 95 percent, with a 5 percent cash reserve. This is because the recent 6- to 7- percent pullback in the market represents a longer-term buying opportunity.
On average, stocks are a bit undervalued, and they’re more so than the market averages would suggest because of the few high flying large-cap technology and Internet stocks, which distort the real picture. As long as you stay away from the minority of stocks trading at PE’s of more than twice their expected growth rate, you should beat the averages moving forward.
Don’t expect the 20-plus percent gains this year, but 10-plus percent on average over the next few years is still achievable.
Good luck this month.
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