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Portfolio strategy update It’s not the beginning of the end David Gottstein
September was a tough month for the markets. It left the DOW off 7.5 percent, the S&P 500 off 2.2 percent, and the powerful NASDAQ off 10 percent year to date. This type of performance is unfamiliar to many investors.
Is this the beginning of the end of the longest bull market in history?
We don’t think so, but the issue is more complicated than that. Employment and personal income are still robust, inflation and interest rates are low, moderate growth in the economy continues, consumer confidence is high, and we still enjoy a peacetime economy. We think all this augurs for a continuation of the long term bull market.
Does this mean that the market will end on a positive note year after year? We do not believe so. Overdue for a down year Customarily, the markets only rise in two years out of every three. We are long overdue for a down year, not due to randomness but because things can’t go right all the time. The American economy is a good place to invest, but is not risk-free.
Investors have been on a feeding frenzy for years, borrowing what they can to invest at still higher prices and expecting more of the same. The effect has been a self-fulfilling prophecy of rising demand for stocks and yet higher prices.
Is this justified?
It is only if performance meets expectations.
It is likely that companies will continue to report higher earnings, although not at the heady pace of the last several years.
There will be some exceptions, particularly in the technology sector. Stocks like Intel, Apple, and Cisco have suffered materially because investor expectations were not realistic. We think there will be further rotations as investors search for the next Holy Grail. PEs do matter Ultimately, good companies with solid earning prospects that are not already overvalued should continue to perform well.
However, we believe that the days of the indiscriminate high performance gains are at an end. Money is getting more cautious, and PEs do matter: really they do.
Editor’s Note: This portfolio update is from, David Gottstein’s monthly newsletters.
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