What Price Growth?
The S & P 500 Stock Index rose 7.71% for the third quarter, as growth stocks led the equity markets to new highs. Many high growth companies, most technology related, are selling at or near record high prices, relative to earnings. At the same time, many quality companies that have had long records of slower growth while paying stable or modestly growing dividends have not kept pace.
The Standard & Poor’s Growth Stock Index is up 17% for the year to date, while the S & P Value Index is up only 3%. The Growth Index is trading at 21.8 times 2018 estimated earnings vs. 14.8 times earnings for the Value Index (the largest spread in recent history).
We have been and remain, long term growth investors. However, the disparity between the two indices above is a concern. Today the relative value of some slower growing companies seems to outweigh the opportunity of faster growing concerns due to price. The absolute risk seems lower to us as well. We continue to look for new investment opportunities, while trying to balance risk. In the current environment, price precludes us from buying some of the fast growing companies we would most like to own, in favor of others growing more slowly, but priced more attractively. Food related, drug, and financial stocks currently fall into this group. They have a place in portfolios at current valuations, although currently out of favor.
The yield on the fixed income portion of portfolios has benefitted from three Federal Reserve interest rate increases this year. It is likely the Fed will continue to increase rates this year and next. We are keeping fixed income maturities short to take advantage of the rate increases, while limiting bond losses in a rising rate environment.