Market Commentary Winter 2015

By John D. Fox, CFA

The U.S. stock market continued to defy skeptics rising for the sixth year
in a row as measured by the S&P 500 Index. 2014 was also the year when
many believe the American economy “turned the corner” with strong
employment gains and consumer confidence hitting a five-year high. This
good news is in contrast to the rest of the world where there is continued
strife and uncertainty in China, Russia, and the Middle East. The two
surprises during 2014 were the decline in interest rates and the sharp drop
in oil prices in the second half of the year.

In contrast to 2013, last year’s gain in the S&P 500 was driven largely by
earnings growth. Earnings growth was also a common theme among our
portfolio holdings. These earnings are the result of modest sales growth
and excellent cost control as many corporations are posting their best
margins. Additionally, many companies are allocating their excess capital
wisely to enhance shareholder value including mergers and acquisitions,
stock buybacks, and increased dividends.

Outlook
While the calendar has changed to 2015, we see no changes to the recent
trends of continued U.S. economic improvement and growth in American
business profits. We also see two major corporate themes continuing this
year — mergers and acquisitions and shareholder activist investing. Both
of these developments are typically positive for stock prices.

Of course, we are not the only ones to recognize these positive elements.
As a result, the good performance of companies is currently reflected in
the prices you have to pay to purchase their stocks. We see most stocks
at fair value, certainly not cheap, and it is much harder to find a bargain
compared to a few years ago. The result is we expect future returns to be
lower than the excellent equity returns of the last three years.

However, we continue to look for investment opportunities in good
enterprises that are well-managed and financially strong. We would not
be surprised if equity markets are more volatile in 2015 than they have
been in recent years. We see volatility as an opportunity — not as a risk —
and will be eager to invest in great businesses at discounted prices during
market declines.

Please see Fenimore disclosure.