Large Cap Commentary – December 2016
Equity markets rose in December and the market witnessed a shift of sorts. Sectors which are less economically sensitive (Utilities, Real Estate and Telecom) came into favor while those that are more sensitive to economic activity (Industrials and Financials) fell out of favor. This shift was not particularly surprising to us given the run more economically sensitive sectors have had since the “Trump Bump.”
As we lean into 2017, and all it brings, investors are focused on change. They are looking for change coming out of Washington, either from the Republican-controlled Congress or the soon-to-be anointed Republican President. Last month, I discussed the Trump Bump and how a few of the incoming administration’s proposals validated the uplift in the market. Rightly, investors reacted positively to these proposals. In 2017, investors will look for concrete actions which confirm these promises of change. At Argent, we are no different. Identifying a “catalyst for change” is paramount to our investment process.
Since the last letter, the Trump Administration has filled out its cabinet. Pundits have argued whether the appointed individuals will validate or negate campaign rhetoric. Another area of focus is the Senate confirmation hearings. That focus will shift on the 20th of January, when Donald Trump is sworn in as the 45th President of the United States. The first 100 days, or the Honeymoon Period, has historically been a window of time that new presidents utilize to pass major legislation through.
As we reflect on the big move in the markets of late, our Rule of 20 reminds us that large cap stocks are not overvalued. Instead, stocks in the large cap universe are fairly valued. The rule measures the balance between equities and fixed-income alternatives and suggests that if we subtract the ten year Treasury note interest rate from the number twenty, the difference should equate to the forward price-to-earnings (P/E) ratio of the market. To us, fair value means that those companies possessing unique, positive traits relative to the market as whole should be disproportionately rewarded. Or, in other words, it is a stock picker’s market.
In that light, we have constructed a portfolio of names that stand to benefit from changes which may be implemented in the coming years. As an example, our process led us to increase our exposure to Industrial companies. This decision was driven by the anticipation of change within the sector and our belief that the upside potential outweighed the downside. Whether this change will come and its magnitude are still unknowns. However, we do know that regardless of environment, we will continue to identify unique companies with a key element of change to drive improvement in results.
We have used this approach to investing since our inception 18 years ago. It has seen us through three different changes in administration and served our clients well. We have three successful equity strategies – Large Cap U.S., Small Cap U.S. and Dividend Select. If you have questions on any of these, or know others who might have an interest in our mailings, please call us.
Senior Portfolio Manager
Past performance is no guarantee of future results. Views expressed herein represent the opinion of the portfolio manager as of the date above and are subject to change. The information provided in this report should not be considered a recommendation to purchase or sell any particular security. You should not assume that investments in any securities within these sectors were or will be profitable. A list of stocks recommended by Argent in the past year is available upon request.