Below is a letter that is written monthly for the benefit of Avondale Asset Management's clients. It is reproduced here for informational purposes for the readers of this blog.
Finally, a chance to write with unqualified good news for once! After 5 straight negative months, the S&P 500 broke its losing streak and was up 10.77% in October. This was the largest monthly gain in 20 years. As I wrote last month, 6 straight negative months is a very rare occurrence, and October proved that some probabilities still hold, even in markets where strange things seem to happen with increasing frequency.
Even despite the rally, Bears are quick to remind investors that nothing really changed in October, and indeed, Bulls should concur. But from a Bull’s perspective, nothing has really changed since May, and that’s what the October rally was all about. From May through September recession fears caused the stock market to convulse, but during that whole time the economic data didn’t really budge.
In October many companies reported earnings and most said that business was still good even if a little slow. October showed that when the market has priced in a recession, even moderate economic growth can be enough to cause a spectacular stock rally. There’s an old saying that equity markets have predicted 15 out of the last 5 recessions, meaning that for every true recession the economy endures, the stock market will discount several extra. If October proves a valid indicator, hopefully this will be one of those times that the stock market has over-reacted.
That’s not to say that Bulls can declare victory though. The economy is moving, but it’s still weak. Notably, labor and housing markets are still showing little sign of life. Auto sales are also well below where they were in the middle of the decade. Americans bought about 13m cars in October (at an annualized rate). In the mid 2000’s Americans would have bought 17m (annualized) in an average month. There’s also still an inflation problem in food and energy prices that few seem to acknowledge, and of course, Europe continues to hang over the head of the global economy. At 12,000 on the Dow though, stocks have priced many of these problems in. From an optimist’s point of view, every problem creates the opportunity for a solution. I’m still extremely confident that for a long-term investor stocks represent a great bargain today.
In our portfolios, I’m very happy with how we performed this month. As mentioned in previous letters, I’ve been keeping extra cash in the portfolios to protect us in the event that the market continued to fall, while maintaining enough invested capital to benefit from a bounce. In hindsight, I clearly wish I would have reinvested more at the beginning of October, but the plan worked well with the amount that we did have invested. At the very least every client kept pace with the rally, and depending on the investment strategy, most did better than their benchmarks despite holding a significant amount of cash. Going forward I continue to look for opportunities to redeploy capital. My intention is to buy opportunistically as the market dips, because stocks never go up in a straight line, and after a month like October there are bound to be some bumps in the road.
Scott Krisiloff, CFA
Opinions voiced in the letter should not be viewed as a recommendation of any specific investment. Past performance is not a guarantee or reliable indicator of future results. Investing is subject to risk including loss of principal. Investors should consider the suitability of any investment strategy within the context of their personal portfolio. For more information on Avondale Asset Management, readers may be directed here.