 |
|
|
|
|
|
|
|
 |
|
 |
 |
|
|
|
 |
< back to Income Equity page
Income Equity Portfolio
Investment Review and Market Outlook
2Q02
The second quarter of 2002 was extraordinarily challenging and Berkeley
is pleased to have been able to do better than the market in such a
difficult period. The market was under pressure from a number of issues
but we believe that the economy will continue to grow this year and next
and that the stock market will eventually reflect renewed economic
expansion.
The Standard & Poors 500 stock index is currently selling at 20 times
estimated 2002 earnings per share. On average, over the past fifty years,
the S&P 500’s P/E ratio has been 16 times earnings. The key determinants
of P/E ratio are inflation and interest rates. Inflation today is 1.5%
compared to an average of 4.5% over the past 50 years, or about 3% if we
exclude the unusually high inflation of the 1970s and early 1980s. The
10-year U.S. Treasury yields 4.7% today compared to an average of 7.3%
over the past fifty years. On this basis, current valuations look quite
reasonable.
Earlier this year, the market was worried about the economy overheating
and believed that imminent Federal Reserve tightening would soon lead to
higher interest rates. Much of the strong first quarter GDP growth was,
we feel, due to factors which proved to be unique to the period
including (1) unusually mild weather in January and February; (2) tax
refunds 17% higher than the prior year; (3) the second phase of the 2001
tax cuts; (4) lower energy prices and lower mortgage rates than a year
earlier. On this basis, we expected economic growth to slow to a more
sustainable pace in the second quarter and that is what occurred. As a
result, fears of Fed tightening and higher interest rates gave way to
expectations of continued moderate interest rates and even to fears of
the economy running out of steam and rolling over once again into
recession.
We feel that growth in the second half of 2002 will average about 3%, a
healthy and sustainable rate which will finally clear excess inventory.
Business spending should resume its growth, joining consumers and
government spending growth in keeping the economy growing. Corporate
profits have been growing again this year and could advance 20% in 2002
from depressed prior year levels. Further, we fully expect profits to
grow another 20% next year. Productivity growth is being sustained as
companies are slow to add employees despite the recovery of demand. This
is normal in the early stages of economic expansions. Similarly,
inflation remains very low, also typical of economic recoveries.
Pessimism about stocks in the second quarter related as much to issues
of corporate accounting and governance as it did economic fundamentals.
We believe the White House has contributed to investor uncertainty by
“lighting a long fuse” on Iraq, probably even more of a negative for
stocks than renewed budget deficits or a reversal of the free trade
policies of the prior twenty years.
Investors need to remember that the stock market is a constant struggle
between fear and greed. We saw “greed” peak in the first quarter of 2000;
we need to recognize “fear” as an opportunity. If everyone feels
comfortable investing in stocks, they are probably overpriced. The
reverse also holds true.
We moved into defense stocks for the first time in years in the second
quarter, buying Raytheon. We sold Bristol Myers Squibb due to our “stop
loss” sell discipline. We are looking at the current market weakness as
an opportunity to buy good companies selling at fair prices which we
believe are cheap for transitory reasons. This is classic value investing.
< back to Income Equity page
About Us | Products | Personnel | Resources | Contact
The opinions expressed are those of Berkeley Capital Management and
based upon sources deemed reliable. BCM shall not be held liable for
inaccurate information obtained from these sources from which BCM could
normally, reasonably depend on as accurate. Past performance does not
guarantee future results.
FOR BROKER-DEALER USE ONLY. NOT FOR USE WITH CLIENTS.
A complete list and description of all the firm's composites and
individual securities' transactions and returns for the past twelve
months are available upon request.
|
|
|
 |
|
 |
|
|
 |
 |
|
|
 |
|
 |
 |
|
|
 |
|
|
 |
|
|
 |
|
 |
|
 |
|
| |