Crosswinds: Crouch Connection, November 2015
It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to Heaven, we were all going direct the other way. ...
Opening paragraph of "The Tale of Two Cities" by Charles Dickens
That is exactly the way I have felt as I have sat down multiple times to pen my thoughts for the Crouch Connection this month... there are so many crosscurrents that seem to trend very bullish one day and then just as bearish the next day. As one of my favorite market philosophers, Jeff Miller, wrote about last week's rally:
...the week included a rally that most found inexplicable. Gains occurred in the face of terrorist actions, falling commodity prices, and a strong signal of an imminent increase in interest rates. The strong rally left most participants shaking their heads and reaching to invent explanations.
And there is one thing that you can say about the market with absolute confidence -- the market does not like uncertainty! So what is an investor to do?!
OCTOBER EMPLOYMENT REPORT VERY STRONG! The Employment Report this month was particularly encouraging, as it showed the economy generated 271,000 jobs in October, well beyond the 120,000 monthly pace that would be consistent with population growth. Private payrolls provided the bulk of the increase, and 268,000 of the jobs came from corporate America. In addition to the strong jobs growth, the unemployment rate also dropped to 5.0% as the employment gains outpaced growth of the labor force. Wage growth accelerated to 2.5% over a year ago, the best growth in six years.
This appeared to settle the question about whether the headwinds the economy has been facing from the strong dollar and the weak industrial economy, resulting from the falling commodity prices, would drag the economy down into a recession. When combined with the reports from the Institute of Supply Managers (ISM) earlier this month, the body of evidence now suggests that the domestic economy is overcoming those headwinds and growing at a quite healthy pace.
While the above-average jobs number and a strong ISM Non-Manufacturing Index suggest that our economy is quite healthy, there are still significant issues that we are facing. While we could list a dozen issues the media is buzzing about, there are just a few we believe cause fundamental concern:
FED RATE HIKE. While the market quickly concluded that the Fed has no reason to further delay an increase in interest rates, and the consensus quickly concluded that a December rate increase was all but certain, we believe a slow, steady, quarter-point at a time rate increase policy will have little effect on the stock market. However, if inflation were to become a problem (which we do not expect) and the Fed were to step up the rate increases, that would likely not bode well for the stock market.
STRONG DOLLAR. The combination of higher interest rates here -- while several of our trading partners are printing money -- will almost certainly cause the dollar to continue to get stronger, creating competitive pressure on U.S. firms selling into foreign markets (most of the Fortune 500). This will hurt the earnings of many U.S. firms, which in turn will put pressure on the market.
LOWER OIL PRICES? While lower oil prices will be good for the American consumer and ultimately good for the markets, the immediate job cuts and the capital spending cuts it causes will continue to weigh on the economy. According to the third quarter reports from oil producers, there has been very little net slowdown in oil production. Until we see significant cuts in production, we believe oil prices will continue to drop, something that has kept the market on edge thus far.
EMERGING MARKETS TURMOIL. We have seen some stability in China's economy in the past month, but authorities have severely cut infrastructure spending (road construction, high-rise buildings) in an effort to slow down their growth of debt. This has had ugly consequences for Brazil, Australia, Chile and other countries that had been supplying iron, steel, copper and other commodities to the Chinese. Our friends at Credit Suisse say a sharp further decline in Chinese growth could be a shock to the world economy, what they call a "low-probability but high impact event."
We are following these issues carefully and watching for any signs that the industrial economy is slowing down our services economy. For now, the market is telling us that the service economy is winning the battle between the bulls and the bears.
This is probably the most cautious Crouch Connection I have ever penned, and I believe we do need to be cautious, but not bearish. As I have explained many times, Warren Buffett's disciplined strategy is simply to identify and measure risks, and avoid risks that either look too difficult to evaluate or too great to accept. Here are the foundations we believe will support us through uncertain times:
DIVIDENDS. Stay focused on strong companies with a disciplined dividend-paying history. They have survived all the difficult markets over the past century.
STAY INSIDE AMERICA. We believe exposure outside the U.S. is not worth the risk right now. Dollar exchange rates cause lots of headaches for multi-national companies, and we believe it will pay to limit our exposure outside the dollar.
UTILITIES. Utility companies offer some of the best dividends available, with almost no exposure outside the U.S. We continue to believe that utilities offer one of the best risk-reward propositions available, and that all retirement portfolios should be built around a core portfolio of utility stocks.
SOLID CORE GROWTH. We embrace the companies with the most consistent growth records...now is not the time to be betting on the economy getting stronger. Stick with solid, consistent growth.
CASH. Times like this can be an excellent opportunity to buy some of the core growth companies that rarely trade at attractive prices. That is why we are keeping some cash available here as we have a list of our favorites handy in case we see them at unusually attractive prices.
With all these mixed signals we are dealing with right now, we are even more convinced that strong companies with a disciplined dividend-paying history are the best investment an investor can own over a lifetime. While the "worst of times" can make you nervous, they can also be the "best of times" if you make good fundamental decisions with solid American companies. That's what drives our efforts every day.
Please let us know if there is any way we can be of service to you. The team at Aspen Grove Asset Management is constantly focused on refining our processes to better serve our customers, and we want to use our talents to help make your life a little better...let us know how we can assist you. Have a wonderful Thanksgiving!
Dave Crouch Cherie Hammond
Financial Advisor Financial Advisor, CPA
Registered Principal Business Development
"Be fearful when others are greedy and greedy when others are fearful."
-- Warren Buffett
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