We are right in the middle of first quarter earnings season and the results are mixed with about 70 percent of companies beating expectations. Companies with large international exposure dealt with slow global growth and currency headwinds during the first quarter which put a dent in earnings. Thus far earnings are about what we expected, but as my colleague Charlie Toole pointed out in his blog two weeks ago, we are paying particular attention to CEOs’ commentary on future earnings expectations and less so on the just finished quarter. Looking backwards is often less insightful as the market is forward looking.
Commentary from companies’ management has been cautious about the remainder of the year as most industries continue to grapple with mediocre growth both domestically and abroad. Although this may sound negative for equities, on the surface and in headlines we have been able to glean some real positives during this quarter’s earnings announcements. First, the recent weakness in the dollar should provide some relief to multinational companies in the second quarter. Even more important is that companies over the last few years have cleaned up their balance sheets and used inexpensive financing to make acquisitions. A key takeaway from the earnings reports is that many of these acquisitions are bearing fruit to drive revenue higher in the coming quarters. And lastly, the majority of companies that we own have increased their dividends, which is a great way to return capital to shareholders. We love to see shareholder friendly management teams.
Although we feel the markets are on solid footing moving forward especially with the companies we own, retail investors continue to flee the stock market. The annual Gallup poll of adults invested in the stock market has declined from the high of 65 percent in 2007 to 52 percent in the most recent reading in April of this year as shown below.
Even as we bump against all-time highs in the market, it is surprising there is so little interest from retail investors to move money back into equities. In an environment where inflation continues to remain lower than trend and interest rates are at historic low levels, we think it makes sense for growth investors to stay overweight equities where appropriate. There are still many areas of the market that remain undervalued and if sustained global economic growth occurs in the second half of the year equities should continue their recent positive momentum.
We certainly understand retail investors’ apprehension with the equity markets given the pain evoked from 2008, the advanced age of the current bull market, and the many gut wrenching volatile moves both up and down recently. Last year was also a challenging year in the global equity markets. However, in an environment characterized by extremely low bond yields, unprecedented global liquidity, low unemployment and a global focus on earnings and economic improvement, we continue to believe global equities will outpace fixed income investments. We simply believe quality equity investments will provide investors the opportunity for a competitive return moving forward whereas bonds continue to face high valuations and very little opportunity for yield. And with near zero yields, CDs, money markets, and high quality fixed income investments do not appear likely to offer investors the return needed to meet most investors’ goals.
Christopher S. Deeley, CFA
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