The surest test of discipline is its absence

October 6th, 2017

“The surest test of discipline is its absence”
-Clara Barton

The stock market has delivered another impressive quarter rising 4.5% from July through September and up 14% year-to-date. Investors are continuing to block out political noise and remain focused on earnings and the impressive strength of the global economy. The valuation of the stock market remains near the high end of the historic range, trading at 18x projected 2018 earnings versus the ten year average of 14.1x. Our investment discipline draws us to focus on fundamental results and we’ll highlight some of the key factors that are influencing our outlook.

Investors who have missed the recent market rally frequently cite the length of the economic recovery indicating a recession must be on its way. While the recovery is long, the economic data supports an outlook of further expansion. In the United States, GDP expanded by 3% in the most recent quarter, one of the better reports in recent years. Employment data remains good and continuing unemployment claims are at a ten year low. The ISM index report last week signaled a very strong outlook for both industrial and non-industrial growth.

The global economy is enjoying its best growth surge since the beginning of the decade according to Christine Lagarde, head of the International Monetary Fund. Ms. Lagarde highlighted strong household consumption and business investment even in countries such as Italy and Portugal as signs for optimism. Spending in Japan has been growing rapidly, and China and India are likely to be the fastest growing large economies in the world with both countries’ GDP expanding by 6.8%.

We expect the Federal Reserve to raise the Fed Funds rate again at its December meeting. We believe that the low rates available to borrowers has done more damage than good in recent years and a return to normal will be helpful to savers. Borrowers have had almost a decade to refinance and lock in low rates so we don’t expect modestly higher rates will crimp economic activity. At some point, higher bond yields will begin to attract some money from equities and we think that de-risking activity is prudent. Not every investor should be in only equities.

Given the fluid geopolitical landscape, we are fully aware that equity market volatility could spike upward for any number of reasons ranging from North Korean nuclear activity to an unnecessary Trump tweet. Our plan is to focus on underlying company fundamentals when periods of political unrest arise. Finally, while the economic backdrop appears sound, we want clients to understand the stock market has delivered excellent results and a pause in the market would not be surprising, in fact it would be healthy to have a period of digestion.

During the quarter we sold client positions in Amerisource Bergen, a drug distributor we owned for many years. Recent results have been subpar and there is risk of competition from new market entrants. We purchased shares of Alibaba, often referred to as the “Chinese Amazon”.

We did so to gain additional exposure to the massive growth in online shopping ecosystem that is rapidly capturing the global consumer.

Thank you for entrusting Ayrshire Capital Management LLC with the management of your investments. We look forward to speaking with you in the coming months.

Sincerely,

JM Sam Nevin, Jr.
Managing Partner

AyrshireCapital_Q3_2017.pdf

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