Large Cap Commentary – August 2011
In recent months stock market volatility has increased to the point of grabbing headlines on the nightly news. This has left some investors asking whether the recent volatility foreshadows a return to 2008. We at Argent do not think this is the case. When we look at corporate profits and corporate balance sheets, we see that there is considerable strength in corporateAmericatoday, especially compared to the over-extended period of 2007 – 2008. Similarly, while there is some pressure on European financials, credit markets in general are liquid and well-behaved.
Additionally, when we speak with ourMain Streetcontacts the feedback we receive is that business has slowed. Likewise, those business contacts indicate that they are closely monitoring their budgets and are being frugal in regards to any incremental spending decisions. Their feedback jibes with the general economic picture as a whole, a topic we have written about over the past several months, which is characterized by relatively high unemployment levels and tepid growth.
While one would prefer a rosier picture, everything must be taken in context when it comes to investing. For us at Argent one key component of investment decisions is valuation. Today, the S&P 500® Index is trading at slightly over 11 times expected earnings for the next twelve months. Since 1999, the last time we were at that level was in late 2008 and early 2009 when we were in the midst of the financial and real estate collapse. At the same time, the 10-Year Treasury bond yield has fallen to record levels, below 2%. For Argent Capital this looks like a moment when we and most other large cap stock investors are getting paid to take risk.
Having said that, and because our investment process mandates prudence, the chart below illustrates how our current portfolio exposure maps against the market cycle (that is, percentage of portfolio invested within stocks historically best-suited for each portion of the market cycle).
While we are being selective, adding stocks to our portfolio only upon meeting our stringent investment criteria, we believe we are exercising proper caution by juxtaposing our individual stock selection against a carefully constructed portfolio that, on balance, reflects our view of where we are in the market cycle. As always, we appreciate your interest in Argent Capital Management and hope you will mention our name to others.
Senior Portfolio Manager
Views expressed herein represent the opinion of the portfolio manager as of the date above and are subject to change.