Friends,
September was a difficult month for the financial markets, but year to date performance for the stock market is still strong. Through the third quarter, the U.S. stock market was up 15% year to date. Foreign stock markets were up collectively about 6% and would have been much better if not for losses in emerging markets, especially China. Bond markets were down 1-2% year to date as price decreases offset interest income. We and all investors are watching any number of issues, including: Covid-19 and its impact on the economic recovery, supply chain bottlenecks and their impact on growth and corporate earnings, inflation concerns, Federal Reserve policy on tapering and interest rates and U.S. fiscal policy regarding taxes and government spending.
Despite the issues noted above and the fact that equity valuations are at above average historical levels, the stock market has pushed higher. Why? Corporate earnings growth, consumer spending and GDP growth have been extremely strong; the business cycle looks good at least into 2022. While valuations are higher than normal, stocks still look attractive versus other asset classes, especially fixed income. Moreover, stocks are often overlooked as an inflation hedge due to pricing power held by many of our largest public companies who are able to pass along cost increases to their customers.
We remain disciplined regarding our strategic allocations to equities including foreign stocks. Although foreign stocks have underperformed vs. U.S. stocks in recent years, their lower valuations put them in a position to potentially outperform in the years ahead. Having said that, we have not had a correction of more than 5 to 6% in over a year and, frankly, that is not normal. We should not be surprised if we get a more typical correction in the coming months….but that’s no reason to panic or make big moves. As usual, we’ll be buying stocks if and when that opportunity presents itself.
Regarding the bond market, we have modestly reduced our allocations and have repositioned our portfolios to be less exposed to inflation and rising interest rates. Conventional wisdom suggests that rates should rise from where they are today, so we have to be positioned for that.
All in all, we anticipate increased volatility in markets as the many economic and government policy issues work themselves out over the coming months. At the end of the day, we are investing in great companies with smart management teams who are committed to growing their businesses and increasing shareholder value. Over time, these investments have been well-rewarded, and we see no reason to doubt that will be the case in the future.
Please let us know if we can do anything for you and thanks for your encouragement and support.
Matt and Andrew