by John D. Fox, CFA
Investors entered 2013 fearful of the “fiscal cliff” and skeptical of the stock market as the world seemed to bounce from crisis to crisis during the previous five years. We exited 2013 with better economic data and growing interest in equities as the U.S. stock market posted a very good year.
2013 marked the fifth consecutive year of positive equity returns as measured by the S&P 500 Index. The current Bull Market was born during a time of pessimism about the economy and doubts about the long-term return potential from owning equities. Today, the mood is much better. Without a doubt our nation’s economy is growing. According to The Conference Board Leading Economic Index®, in a press release dated December 19th, the U.S. economy “…continues on a broad-based upward trend…”
The Company Level
A growing economy is important because the stock market should reflect the value of corporate profits. So as an economy grows and businesses enjoy a resulting increase in sales and profits, business values grow and should be manifested in higher stock prices. This is exactly what has occurred over the last five years. In the recession year of 2009, the companies in the S&P 500 reported profits of about $60 per share. For calendar year 2013, the current estimate of profits for the S&P 500 corporations is more than $105 per share. That’s an increase of 75% in just four years.
This relationship between earnings and stock prices holds for individual businesses as well. It is why we put our focus on the operations of the companies in which we invest. Our investment approach is based on the belief that over time the price of a stock should follow the value of the underlying business. We don’t know what will happen in the stock market over the next year. However, we do believe that well-capitalized, profitable businesses that are well-managed should increase in value over time — and that value should be reflected in their stock prices.