“Keep your face always toward the sunshine – and shadows will fall behind you”-Walt Whitman
Wall Street loves predictions because they provide direction to investors even if the forecasts have no relation to the market’s longer term performance. Some prognosticators are predicting that the stock market could be in for a tough period in 2015. We agree that after six up years for stocks it’s likely the markets will be more volatile; yet, is that relevant over the intermediate term? As long term investors we focus on the factors that influence corporate earnings, not near term market calls. In this quarterly update we’ll comment on some trends that may impact the investment climate over the next few years.
Oil, which had been trading around $100/barrel, has fallen to under $50/barrel in less than 6 months. Contributing to the collapse is an excess supply of oil resulting from the success of fracking programs in the United States and OPEC’s decision to maintain its production levels despite cutting demand forecasts. Exploration & production companies that have taken on debt to exploit the fracking boom are being hurt, as are oil exporting nations. On the other hand, strong energy companies are in excellent position to acquire assets that will likely provide solid returns over time. Additionally, consumers are benefitting from lower gasoline and heating oil prices. Overall, cheaper oil looks like a net positive.
The United States economy remains healthy. As 2015 begins retail sales, consumer sentiment and employment data suggest that US domestic spending should accelerate. The latest measure of domestic GDP indicated economic growth of 5%; truly shocking given the weak, snow filled start we had to 2014. Foreign investors have been purchasing US assets, driving the dollar higher. While a stronger dollar can negatively impact exports, almost all major US corporations have global operations that provide an effective hedge to currency exchange exposure. Therefore, we expect the strong dollar to have a very modest negative impact on US economic expansion.
At the same time US economic conditions are improving, signs of stress are increasing in Europe and Asia. The Eurozone is suffering from a stagnant economy, weak currency, and deflationary pressures. The European Central Bank is balancing the need to fight deflation with fiscal austerity measures which were imposed on its weaker member nations during the financial crisis. In Asia, China is attempting to migrate from a capital expenditure driven economy toward a more consumer oriented market. How well the central government of China manages the transition will be an important factor and we’ll be paying close attention to its progress.
Investors are right in asking us whether the market is expensive. Stock multiples have moved up toward the higher end of the historic range, therefore we don’t expect multiple expansion to play a significant part in equity returns. We expect the performance of stocks to be influenced by the underlying business growth rates and inflows of foreign money into US markets. While markets may be more volatile, we believe stocks are unlikely to suffer a substantial decline because cash and intermediate bonds are generating yields below the rate of inflation. Our objective remains the same: to focus on owning quality companies generating solid cash flow that are run by management teams utilizing corporate resources in shareholder friendly activities.
During the quarter we made few changes to client holdings. We added to our holding in Amazon.com after the stock declined from our initial purchase price because our long term opinion remains positive. We also sold our holding in IBM Corporation, recognizing that management is having a difficult time overcoming the headwinds of its hardware business and service offerings. Unfortunately, the company’s evolution toward a cloud orient business is taking longer than expected.
Thank you for entrusting Ayrshire Capital Management with your money. We look forward to speaking with you over the coming quarter.
JM Sam Nevin, Jr.
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