Signs of Change in Washington?



Last week, there were some signs of at least a temporary reprieve to the political gridlock in Washington, as the House passed a Budget agreement. One can only hope this is a sign of some changes to the political landscape, or at least an indication that politicians realize the ramifications of the political skirmish over the budget earlier this quarter. Hopefully, the bill will pass the Senate as well.

The agreement also helps to remove some of the uncertainty the market has faced during much of this year. The economic outlook shows signs of improving. Significantly, the trends in Employment data continue to improve.

Year-to-date the S&P 500 is up nearly 25%, an atypically strong result that is unlikely to be repeated in 2014. Since 1950, the S&P 500 has increased by more than 25% 12 times. When stocks rise this much, they have a tendency to deliver above-average returns in the following year as well. Stocks have delivered an average annual gain of 9% since 1950. However, after a 25%-plus rise, the market tends to outperform its average, returning 11% a year. In addition, the odds that market returns will be positive are also higher. Overall, over the last 63 years, market returns have been positive 73% of the time. However, in the year after a 25%-plus rise, market returns have been positive 83% of the time. Of course, it is important to remember that past returns are not necessarily indicative of future results.

The Fed could start tapering its asset purchases as early as next week. If not then, we expect tapering to commence within the next few months. At the same time, we continue to believe that the Fed will maintain its zero interest rate policy, possibly into 2016. The low interest rate environment should be another positive for equities.

In this environment, we often see stocks that look to be trading close to or modestly above fair value. As investors, we remain true to our conviction that the best approach is to diligently look for companies with durable competitive advantages that we believe leave them well positioned for the long term.