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Portfolio strategy update The glass is half full David Gottstein
This has been a troubling year for the stock market primarily because too much has been expected from it. Willing to pay almost any price for indeterminable earnings growth rates, people began to think our economy was invincible and that we would have super growth for as far as the eye could see.
It is true that the computer internet revolution has set a new standard for human productivity. Additionally, the build out of the infrastructure of the new economy has spurred tremendous growth in certain sectors. Most notably computers, networking, telecommunications, fiber optics, and cellular technology platforms have paved the way for the digital world, and have accounted for much of the domestic and global growth in the last few years.
Once this great build out catches up with growing demand, we should see more conventional growth rates resume. However, there will be pockets of super growth in certain advancing technology arenas. Once half the world has cell phones, there will only be half the world left. The point of all this is even absent restrictive monetary policies from the Fed, there is likelihood that forty percent growth rates give way to thirty, and then to twenty, a little bit further down the road. A dose of reality All this being said, Alan Greenspan has succeeded in slowing the economy down enough to have a real impact on the perceptions and realities of corporate earnings growth rates. Even though the market seems to continue to justify seemingly high PE's, they are not so high when taking into account low inflation, low interest rates, and high earnings growth.
However, the recent compressions in the markets, particularly the Nasdaq, are a healthy dose of reality. Even though a lot of investors have suffered and fear the worst, a half empty cup, the truth is that the economy is still very strong.
Nortel Networks' stock price has almost been cut in half because the market had bid up the price to a level that the company couldn't support high returns against. The president of the company is not ashamed of their 40 percent growth rate. He is not to blame for what people paid for his stock.
Now Nortel represents a great company at a fair price. Different company, no. Just a different price. The point is, the long term bull market is still in place. Fair values should continue to rise at near historic growth rates of about 10 percent. It's just that sometimes prices get a bit ahead and have to come back to reality on their continuing path of higher and higher earnings over time. Just not in a straight line.
The market historically rises about two years out of every three. We are long overdue. Stay the course though. Fasten your seat belts One thing the market hates is uncertainty. The election, the Middle East, oil prices and supplies, the Euro and other external factors weigh on the market.
We are in a period of change, and therefore less certainty. That usually leads to greater volatility. Even though the market has suffered and has rebounded of sorts, the problem period is not over. Some of these uncertainties will have to be better defined to get past this. In the end, the likelihood is that the American economy will absorb what the world has to offer and get past it in good fashion.
The economy, jobs, incomes, tax receipts, and corporate earnings will continue to grow. Albeit slower than recent history has experienced. Even so, our prosperity will continue. Even under the prospects of a continuing bull market, we still believe that there are likely to be periods moving forward in which corrections will create some buying opportunities.
We are therefore maintaining an investment equity allocation of 87.5 percent. We are leaving 12.5 percent available for purchase, and otherwise defensive purposes.
Editor's Note: This portfolio update was written in early November.
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