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Investing in Uncertain Markets | Crouch Connection, May 2016

Even though the Fed rate hikes appear to be on hold till after the elections, the weight of the evidence continues to suggest that the economy is struggling to gain enough momentum to keep the market rally going. The disappointing first quarter GDP growth of only .5% underscored by the weakest corporate capital spending in seven years, first quarter corporate earnings down a negative 7.7% year-over-year with revenues down 2.2%, and a disappointing April jobs report all combine to build an uncertain picture. Political uncertainty, seasonal headwinds as we head toward September and October, and stocks priced at valuations suggesting there is no uncertainty (really?) give us plenty of reasons to pause and consider our investment strategies.

Predictability is Paramount!

As many of you have heard me say in portfolio reviews recently, Warren Buffet’s investment principles have evolved over the years in an attempt to increase the predictability of his investment results. His practices are designed to reduce the effects of the randomness and uncertainty of the markets and focus on factors that can be easily understood.

As we have described, one of the first steps we need to take is to “peel back the layers of the onion”. The market is made up of many industry groups and sectors and each of them is driven by different forces and factors. By evaluating at each segment on its own merits we feel like we can weigh the risks and potential rewards much more accurately.

For instance, anyone who has discussed investments with me for more than a few minutes knows that I believe that regulated utility stocks offer more predictability than most any other sector of the market. Operating as monopolies in their respective territories in addition to government regulated utility rates suggest that earnings from these companies will be relatively consistent and affected mostly by weather which tends to even out over a period of years.

In contrast, technology companies tend to be much more volatile and subject to factors that are hard to foresee. Will unknown competition be coming out of nowhere? Who will be the next Facebook? Will it be desktops or laptops or tablets or smart phones? These industry trends seem to be unpredictable and random to a stock picker from Tennessee so we think it is wise to avoid what we cannot reasonably understand.

Each industry group exhibits unique factors that are much more understandable when separated from the muddle of the broad markets. Agricultural equipment sales are impacted by the price of corn more than almost any other factor. Corn prices affect farm profitability more than any other factor, so farmers tend to spend more on farm equipment when corn prices are higher and less when corn prices are lower. Therefore you must be watching what affects corn prices when investing in ag equipment companies and adjusting your view accordingly.

Healthcare companies are buffeted by many forces outside their control. In spite of some of the best management teams in the business world, healthcare stocks are routinely blindsided by political and regulatory issues that come out of nowhere from some ambitious politician attempting to score points or a zealous regulator intent on reigning in the costs to our government healthcare programs. Again we prefer to step aside from those types of risks.

With the winds of uncertainty blowing all around us, we believe that predictability is paramount and that we need to make every effort possible to stick with investments we can understand and avoid those driven by factors we cannot reasonably measure. In a slow-growth economy there are still some areas we believe we can find value and we continue to focus on factors we believe we understand and avoid those that are too difficult.


Aspen Grove Asset Management is committed to providing you the best client service experience possible. Please continue to let us know if there is any way we can assist you.

Any opinions are those of Dave Crouch and not necessarily those of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change without notice. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Past performance may not be indicative of future


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