Casting About

Stock prices, as measured by the S&P 500, rose 7.7% during the third quarter and are now up 10.5% year-to-date.  These returns are generally in line with historical returns.  Stock prices did jump 21.8% in 2017, but over the last 30 years, stocks have averaged 12.1% annually (1988 – 2017) with a standard deviation of 17.2%.  Based on these figures, the stock market is in “business as usual” mode.  It generally produces returns for which investors, at the end of the day, are rewarded for the risk they undertake. 

That said, investing in the stock market (or staying invested) has always been challenging.  For example, in recent memory, stocks fell 37% in 2008, 22% in 2002, 12% in 2001 and 9% in 2000.  The message is that the average returns of the stock market are available, but to capture them requires a willingness to endure some discomfort and avoiding the impulse to completely disinvest.

Many people are anticipating some type of disruption, as the record bull market grows long in the tooth amidst heightened levels of political turmoil.  Some are casting about for the next sign of trouble.  This could be a peripheral economic indicator or an exogenous shock – something unpredicted that ends up influencing the economy and, ultimately, the financial markets.

Unknown risk factors are difficult to identify and can take control of the markets in a blink.   For example, on October 19, 1987, the Dow Jones Industrial Average fell 22 percent in one day!  It may have been the experimental use of portfolio insurance (program trading), inefficient stock market technology, the huge budget deficit, or who knows what else.  These and other factors led to panic on Wall Street.  That was thirty-one years ago, and while the stock market has evolved enormously since then, we are curiously no better equipped to predict a crash today than we were on Black Monday.  

On a macro level, there are valid concerns such as the national debt and student loans.  The national debt is approximately $21 trillion.  Interest on the debt is rising quickly.  A recent report by the Congressional Budget Office shows that the fastest-growing federal government expense is the interest on our debt.  The expected bill for 2019 is $390 billion, which is 50% more than in 2017.  The report projects the US budget deficit to expand from 3.5% of GDP last year to 9.5% by 2048.   Student loans now rank as the second-largest category of consumer debt (behind mortgages) with a total debt of $1.5 trillion, and 10.7% of the 44 million borrowers are 90 days or more delinquent. (Forbes 6/13/18)

On a more fundamental level, the housing and banking sectors typically do well when the markets are healthy and anticipating growth.  Though the stock market continues to trend higher (20 of the last 22 months), these very two sectors are demonstrating notable weakness.   Weakness in the housing market is evidenced by the CaseShiller Index, which has fallen to its lowest level since March 2010. The malaise in the banking stocks may be due to troubles banks are having securing and paying for deposits – which ultimately impacts their future profitability.

On the contrary, the 2017 Tax Cuts and Jobs Act has clearly spurred a robust inflection in corporate earnings, and this is moving stock prices.  Currently, the aggregate CY 2019 earnings estimates for the S&P 500 are $178.  Using an 18x (trailing PE ratio) multiple on $178 in earnings, would put the S&P 500 at $3,200 at the end of 2019.  Investors using these figures (based on the current quarter-end price of $2,914) expect a 10% return from stocks in the coming year, which is on par with historical averages.

In my opinion, the stock market (from a fundamental perspective) is not cheap, but it is certainly not overpriced, either.  According to FactSet Research, the current forward P/E ratio is 16.8x (based on the above earnings forecasts) versus a 5-year average of 16.3x.  The risk is a deceleration in earnings and/or a compressed multiple.  These are not new worries – they simply feel magnified by the remarkably emotional and politicized haze through which we now view and filter news.  Unable to attach market significance to odd behavior and mistruth, we will rely upon fundamental and technical factors and hold a steady course for now.  I am happy to discuss this with you in greater detail if we have not spoken recently.  Please feel free to reach out.


Bruce Hotaling, CFA

Managing Partner

Maratona dles Dolomites, Summer 2015

Maratona dles Dolomites, Summer 2015                                                                                                             Maratona








Earlier this summer I was fortunate enough to be able to spend some time with my friends from InGamba at the beautiful La Perla hotel in the South Tirol. On the agenda was a race that takes place each year called the Maratona. It’s referred to as a grand fondo, but any time you put a number on a cyclist’s back and start a clock, it’s a race.

The Maratona starts in the postcard village of Corvara. The locals speak Ladin and have lived sandwiched between the Austrians and Italians for generations. The course is 138km long with over 4,000m of climbing and crosses some of the most iconic passes visited by the Giro d’Italia.

Helicopters hover over the 9,000 riders at the starting providing live television coverage. The vast throng of riders is overwhelming and I know I’ve never seen so many avid and fit cyclists at a start line in my life. Ascending the 33 hair pin turns of the Passo Pordoi from Arabba, there is a mesmerizing line of riders as far as the eye can see. At the ski station at the top, snow pockets line the northern aspects of the mountains. The massive glacier the Marmolada looms in the background.

The Passo Giau is the highest point of the ride (figuratively and in fact). It circles mercilessly at an average 9% grade up around the spectacular Cinque Terre just above Cortina d’ampezzo. The Giau sits atop meadows with bell collared cows, jagged vistas, and switch-back turns. It ends with a somewhat sparky kicker over the Flazarego/Valparola, where there stands the Tre Sassi Fort, an open air museum exhibiting relics of the First World War.

At the finish line, with a big smile and tired legs, there is an immense feeling of gratification. One has to spend a fair bit of time on a bicycle in the first place to even attempt a ride such as the Miratona. Reviewing the day with my friends from InGamba over a glass of Alto Adige Lagrein, we compared notes on crashes (and near misses), wind lashed descents and how the pain suddenly disappears the moment you summit. All riders in our group had their own successes.

There are many daunting challenges to be found in Europe on a bicycle such as the Ronde van Vlaanderen Cyclo in Belgium, Quebrantahuesos in Spain and the La Marmotte in France. Italy is one of the world’s most alluring places and there is something so compelling about the Dolomites that I’m quite sure I’ll pack my bags and head back next year for an encore. If you have been itching for a challenge, and some fun on a bicycle, I suggest you check in with my friends at InGamba: http://ingamba.pro/