TO SUMMARIZE OUR THOUGHTS 9/30/2013
Much of the focus during the quarter surrounded the prospects of QE3
tapering and succession at the Fed, but the attention quickly turned
back to fiscal issues at quarter’s end. The budget battle grew
contentious and lasted a number of weeks. Policy makers have given
themselves another reprieve from crisis until early 2014, but
persistent budget drama in Washington contributes to declining
confidence among consumers and businesses.
Given the strength in the stock market, equity valuations are not as
appealing as before, especially in light of rising interest rates,
declining topline growth and revised outlooks from corporate America.
We acknowledge, however, that fundamentals relative to previous stock
market highs and valuations relative to bonds remain attractive.
In spite of lingering policy uncertainty in the form of QE tapering,
the ever-increasing Federal debt, and geopolitical events, there are
reasons to be optimistic about the stability of the ongoing economic
recovery. Specifically, corporate balance sheets continue to have a
record amount of cash at a time when companies’ capital equipment
is as old as ever, and an inevitable replacement cycle must begin at
Furthermore, U.S. manufacturing has gained a foothold that will
continue to strengthen in the years ahead as production costs have
decreased relative to our trading partners and capacity exists in the
form of labor and energy. In fact, recently the U.S. briefly produced
as much oil as it imported for the first time in 17 years.
With much of the year’s stock market action being dictated by
fiscal and monetary policies, it is important to recognize Federal
support cannot continue indefinitely. As stimulus rolls off the table
and in the coming quarters, and the economy stands on its own legs, we
will look to companies that are well positioned to take advantage of