Large Cap Commentary – December 2013
2013 was quite a year with large capitalization stocks up more than 30%. Interestingly enough, it was not that long ago that long-only equity investors like us at Argent Capital were deemed passé. Cutting edge prognosticators proclaimed that hedge funds or alternatives were the only place to invest. Meanwhile, bond mutual funds were chalking up net inflows as investors fled from stocks. While I am not trying to crow about 2013 equity results, I am trying to point out that, like everything in investments, there are cycles. Several years ago, when hedge funds and bond funds garnered significant inflows, they put the money to work. Their results were relatively strong, which naturally attracted more inflows, which were invested anew. At some point the valuation argument, for bond fund investing, and the scarcity and uniqueness argument, for hedge fund investing, became harder and harder to justify. At the same time, long-only equity investments were shunned. In part, this scenario set the stage for 2013. The coupling of a relatively unloved asset class – stocks – with an improving economy and reasonable valuation was intriguing, if not compelling. Additionally, the actions of the Federal Reserve did not hurt, as aggressive monetary policy encouraged investors to purchase riskier assets since interest rates were so low.
That being said, we expect 2014 will be a harder row to hoe than 2013 for stocks in part because we are looking at a market 30% higher than this time last year. There are, however, positives to remember. The Fed has begun tapering, buying less long-dated Treasury bonds and mortgage-backed securities. This is a positive for two reasons. First, by beginning its tapering program, the Fed is acknowledging that the United States economy has improved. The second positive aspect of the decision to taper is that the Fed has clearly indicated it will back away from its stimulative policies slowly. This should increase the likelihood that the economy can absorb the change.
Another positive, one that I mentioned last month, is that the United States is not alone in its economic improvement. Abenomics, the term used to describe the economic policies advocated by the current Prime Minister of Japan, Shinzo Abe, pushed the Japanese stock market and the Japanese economy upward last year. In addition, Europe appears to be stabilizing. While emerging economies, such as Brazil, are experiencing a deceleration in growth, the developed markets, representing over half of the world’s economy, are doing better. In the large cap space this is particularly important because many of the companies we own and research realize a majority of their sales from abroad.
Finally, even with the advent of tapering, interest rates remain low relatively, with the 10-year U.S. Treasury yield hovering around 3%. For stock investors, the low interest rate environment is helpful. The valuation of stocks should rise as interest rates remain low and alternatives (bonds) remain less attractive. To a large extent, this is the same picture which was painted during 2013, when the price-earnings (P/E) ratios for stocks rose. Although today we are closer to fair value than this time last year, in our opinion, we are still not above fair value – even after a 30% rise in stocks. For businesses, low interest rates equate to low borrowing costs and provide companies increased flexibility as they pursue their business strategies.
In closing, while the 2014 stock market will likely not be as robust as 2013, there are still a number of positives playing out and we at Argent Capital remain bullish on stocks for the coming year. As always, we appreciate your interest in Argent Capital Management.
Ken Crawford , Senior Portfolio Manager
Views expressed herein represent the opinion of the portfolio manager as of the date above and are subject to change. Past performance is no guarantee of future results.