We hope our readers will understand if this edition of the quarterly investment news and views is a little abbreviated. Setting up a new business, getting organized and doing investment work has drawn much of our attention during the last couple of months, leaving us with little time to think of much else. We trust the next issue will return to its well-ripened form, full of wisdom and insight. Nevertheless, the events of late require at least some comment since our clients rightfully look to us for guidance during periods of financial market turbulence and deserve to know that we are active in the pursuit of their interests.
The seemingly violent stock price movements during the first quarter should be viewed in context. 1992 and 1993 were two of the calmest years, in terms of the overall variability of stock prices, during this century. Against this backdrop a return to more normal volatility appears startling. But, in truth, the recent market declines, despite the attention paid to them, do not amount to much. As of the end of March, the Dow Jones and S&P 500 indexes were down 3.2% and 4.4% respectively since year end (not including dividends) and 8-9% from the record highs set around the end of January. These fluctuations are well within historical norms for equity prices.
Market valuation is also part of the context. While the markets did enjoy a prolonged period of relative tranquility, prices still had an upward bias and these two factors together lulled an increasing number of novice stock market participants (we hesitate to call them "investors"), usually mutual fund buyers, into thinking that stocks were a safe place to be. The lowest interest rates in 30 years led them to believe that stocks were the only place to be. Joined by the usual performance-oriented institutional crowd, these forces pumped enough money into equity markets both here and abroad to push them to levels historically associated with extreme risk. Is it any wonder, then, that when the expectations holding the markets aloft, namely, ever lower interest rates, more economic growth, continuing political stability, etc., were called into question, prices, to use a Wall St. term, would "correct"?
We never cease to be amused by the media attention given to relatively minor stock market declines or to the supposedly evil powers, such as hedge funds, that are behind them. Given that stocks on average have been, in our opinion, easily 20% overvalued for quite some time, the price drops don't surprise us, nor are we very impressed or concerned. Indeed, as you well know, stock price movements as such don't worry us at all.
What do we do in such situations? In the past I have likened our investment strategy to the activities of one of those spiders that builds a funnel-shaped web and then lurks in the funnel's throat waiting for something juicy to come along. Well, when stock prices start to drop 1-2% a day for a while, our web starts to shake and we excitedly come out and look around; for, while the average declines are still modest, such situations can beat up individual stocks pretty badly, creating opportunities.
Accompanying this letter is a copy of a "new highs and lows" table taken from the Wall Street Journal of April 1. The table is a simple listing of all the stocks (in this case the ones traded on the New York Stock Exchange) which have reached new 52-week high or low prices on a particular trading day. We find the new lows part of the table to be of interest because it can occasionally lead us to industries or even individual businesses where short term concerns have overshadowed reasonable longer term business prospects and pushed prices below rational levels. The most obvious thing to note about this particular table is the number of new lows (481) compared with new highs (4). A couple of months ago it was just the reverse: highs by far outnumbered lows. Going to work has suddenly become more interesting!
So, in summary, stocks are still pricey, but things are headed in the right direction--at least for now.
Dennis Butler, MBA, CFA