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latest Fed message confirms that external risks have diminished, which
enhances expectations of policy tightening.
While interest rates will likely stay lower for longer, allowing the U.S.
economy to continue its sluggish, low inflationary expansion, there are
some growing headwinds for corporate profits. During the first few
years of the recovery following the 2008 meltdown, corporate profits
grew rapidly as companies reaped the benefits of earlier cost cutting
and had the ability to refinance debt at lower interest rates. Profit
margins surged to record highs. Recently, however, profit margins
have begun to face headwinds as wage gains accelerated but
productivity gains stagnated. So while the basic forecast of anemic,
low-inflationary growth remains much as it has for the past seven
years, profit growth may be entering a less robust period. Given that
equity valuations are somewhat elevated (the market currently trades
at a multiple of 18.5 times earnings, vs. a historical average multiple of
15.5), the stock market could face some air pockets.
In light of the uncertainties occasioned by the Brexit vote and its
potential for disruption, our portfolios have been somewhat more
defensively positioned with lower than normal equity allocations. The
stock market has enjoyed seven-plus years of a bull market and stocks
are no longer dirt cheap. At the same time there are clear earnings
headwinds in certain sectors, so keeping some extra dry powder seems
sensible until better clarity on corporate earnings, economic growth
and geopolitical stability arises.
Transformative Growth Leaders Strategy
A new strategy was implemented during the second quarter; while
most of the portfolio holdings have been in mutual funds and/or
exchange traded funds, incremental gain can be derived from carefully
investing in individual stocks by using a systematic, thematic approach
and strategy, and cultivating these holdings for long term returns as
their underlying businesses and fundamentals blossom and take hold.
With this in mind, the strategy involves buying a focused basket of
stocks (roughly 15 or so) which are comprised of companies which can
generate superior long term growth by dominating their markets,
innovating and disrupting the industries they are in, benefiting from
shifts and trends in the consumer market and having expansion
opportunities ahead of them (i.e. by creating new markets, taking
market share, expanding via international growth, introducing new
products and offerings and/or generating disruptive new
technologies). A strong consumer appeal is also an important thread
throughout these companies; all else being equal, a company that
imprints its logo in the minds of the public stands a better chance of
surviving than one that does not. A strong brand serves to attract, to
habituate, to profit, and to protect.
Most of these companies are household names and in many ways are
part of, and indeed have changed, our daily lives. The objective is