Market Commentary Summer 2014

by John D. Fox, CFA

News from around the globe may be unsettling, but U.S. stocks continue their record-setting pace. Political challenges and unrest made headlines in Russia and Iraq, but the stock market shrugged off these concerns with both the Dow Jones Industrial Average and S&P 500 Index hitting numerous all-time highs during the first half of 2014. The biggest surprise in the financial markets this year is that interest rates in the U.S. declined despite unanimous predictions of an increase.

Commentary from the media concerning investing usually revolves around big themes like economic growth or geopolitical developments. We tend to focus on individual companies because we believe the results of a business will be reflected in its stock price over time. As we look at the state of American commerce today through the lens of our holdings, we see a number of positive trends for stocks.

First of all, stock prices follow profits and the collective earnings of American industry are at record levels. In fact, we expect 2014 to be the fourth consecutive year of record profits for the corporations in the S&P 500 Index. These earnings are the result of modest sales growth and excellent cost control as many businesses are posting record margins. As estimated, our holdings have collectively grown their earnings so far this year.

In addition to profitability, the mergers and acquisition market is very active. In fact, we see FAM Funds’ holdings growing their businesses through acquisitions. The other important trend is that management teams are getting better at allocating the cash that their operations generate. As a result, we are seeing increased dividends and smart share repurchases at many companies whose stock we own.

Of course, we are not the only ones to recognize these developments and the good performance of businesses is currently reflected in the price you have to pay to purchase their stock. However, there are typically out-of-favor areas in the market that provide good opportunities. We are optimistic about the future and continue to work diligently to discover quality companies with long-term growth potential at bargain prices.


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