The stock market declined slightly in December (by less than half a percent); my partnership declined by even less, concluding an otherwise profitable year.
December duplicated the pattern of October, in which the market sold off for the first half of the month only to recover for the second half (switching gears nearly exactly halfway through). The key difference was that this time the decline was shallower, and therefore did not allow me to make any bargain purchases. Not surprisingly, the recovery was also less robust and the market finished the month down.
My outlook remains cautious primarily on valuation concerns. On the surface stocks appear reasonable with the S&P 500 price-to-earnings multiple at 16 times 2015 earnings estimates. Diving deeper into the numbers, however, cyclically adjusted measures such as the Shiller P/E are sky high. Similarly robust valuation measures, such as comparing the total stock market capitalization to the size of the economy (which Warren Buffett in a 2001 Fortune magazine article called “probably the best single measure of where valuations stand at any given moment”) are higher than at any point since 1999, the year before the market crashed and a three-year bear market ensued. If profit margins stay high and interest rates remain extraordinarily low, then perhaps 2015 will continue the market’s recent string of success. If so, my fund will benefit through our quality holdings. More likely, however, there will be periodic bouts of volatility – possibly severe – that will allow for excellent entry points into the stocks of outstanding companies.
The price of oil continued to slide during December. Despite that, my fund’s two energy investments (Exxon Mobil and Chevron) largely held up and we are still ahead in both of them, while most of the energy sector is in tatters. This circumstance is a testament to both the quality of these companies as well as the fact that we only buy in at value prices. I continue to feel comfortable holding the very best companies that are in the business of producing the world’s most important commodity. With the price of oil down 50% in a matter of six months, however, I do not consider them buys at current levels. Indeed I have not bought any additional shares ever since OPEC’s decision not to cut output on Thanksgiving Day and have even gone so far as to trim my Chevron position as well.
Wishing you a happy, healthy, safe and prosperous New Year!
~~Michael Berlin can be contacted at email@example.com and at (631) 629-4928 .
The information included in this article is not intended to be used as a basis for making investment decisions nor should it be constructed as a recommendation to buy or sell any specific security. Consult your investment professional for additional information and guidance.