December Update

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While I’ve highlighted the large cash holdings of a few value investing legends due to current market valuations, the news coming out of the investment banks couldn’t be brighter. While many financial market metrics have reached or exceeded levels prior to the previous two financial crashes, the focus right now is on equity growth relative to alternative assets, which have been reserved due to low interest rates and tepid inflation.

According to FactSet Research Systems Inc, EPS has risen by a robust 6.2% and revenues by 5.9% in the third quarter versus the same period in 2016 for the 95% of S&P 500 companies that have reported thus far.

Strategists at Goldman Sachs, BMO Capital, UBS, Deutsche Bank, and Credit Suisse have all called for double-digit returns in 2018. While there may be a small correction along the way, all strategists expect a nice double digit return next year, encouraging further buys on any price dips along the way. Analysts are comparing the current market to that of mid 90’s, where low inflation helped spurn a lengthy equity bull market.

One thing to keep an eye out for going forward, are the number of interest rate increases projected by the Federal Reserve for 2018. If the 10-year bond yield rises above 2.75%, equities should become less attractive on a risk adjusted basis, given current market valuations. According to Reuters, Goldman Sachs is predicting that the Federal Reserve will raise interest rates four times in 2018 in response to strong economic growth.

I have no idea how this is going to play out. It’s never an easy thing to predict. While I err on the side of such legends as Seth Klarman and Warren Buffett in holding a larger than normal amount of cash, I do realize stock markets could run hot for another year or two. Everything considered, I’m extremely happy that we’ve been able to outperform the market while booking profits and holding a substantial cash position. I’m sleeping well.

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