04 May

Market Musings

Which euphemism best describes today's perception of the market?

    A.  We're climbing a wall of worry
    B.  The market is swimming upstream
    C.  The wind's at our back
    D.  We're walking on air
    E.  All of the above

The first 3 months of 2015 marked the 9th straight quarter of positive returns for the stock market as measured by the S&P 500 Index. A year ago our quarterly letter shared this same fact so now it gets really interesting. We are potentially three quarters away from setting an all-time record for consecutive quarters of positive returns. The previous record stands at eleven and dates back to the early 1960's. As fundamental-based investors, we are far less concerned with past price movements, and more so with future possibilities.

As the macro outlook evolves and current events shape headlines, the basic structure and environment for investors remains unchanged. This may explain why investors of all types continue to experience more of the same. What may be different are expectations, which is a good thing. How?  



  1. As a whole, return expectations continue to decline. When markets initiated this current phase from the depths of the Great Recession, we started with low multiples on depressed earnings for equities and high relative interest rates. Since then, earnings have grown, multiples have expanded and interest rates have declined, producing spectacular returns for both stock and bond investors.
  2. Confidence at the consumer level continues to climb as the shock of the crisis dissipates in the minds of many. Look no further than the return of 'sub-prime' lending in the auto and housing markets.
  3. The US Congress seems to have moved past 'rolling up their sleeves and putting differences aside for the common good' and gone back to the 'business as usual' of partisan politics. This helps assure that change is not coming anytime soon to the economy or to the average citizen.

To be balanced, there are still plenty of issues outstanding that are not dissipating. Guarded optimism may best describe today's investment climate. How else does one explain equity markets near or at record highs and interest rates so low that in Europe, many governments no longer pay interest on new issues of debt but, rather, are paid to hold money?

This is a new paradigm for many and economic theory may explain this phenomena, but it is challenging to rationalize this from a behavioral point of view. In 'normal' circumstances, an investor buys a bond, receives periodic payments for loaning money, and at some point in the future, receives the initial investment back when the bond matures. The length of time and credit risk determine how much interest the issuer must pay. Today, in Germany, the current five-year bond does not pay any periodic interest and will cost you more than the maturing value. In investing, there are no guarantees but in this situation, the investor will have fewer euros in five years than if they just stashed cash in a coffee can and buried it in the back yard!

With nearly $4 trillion worth of bonds priced with no yield or negative yields, there are plenty of smart individuals who are betting that they would rather lose a little in bonds than potentially a lot in stocks over the next 5 – 10 years.

So, once again, we acknowledge the bi-polar nature of the investing public and continue to seek a path that provides for meaningful return potential while assuming appropriate risk. Leading this strategy in the public markets is challenging but rewarding. We have confidence that our holdings will hold up well when the next correction /recession hits (and there will be one). We also continue to seek non-public opportunities to augment portfolios with characteristics that provide for limited downside risk while providing meaningful opportunity.

Thank you for taking the time to read this blog and contact us to continue the conversation.


SAVE THE DATE: EPIQ Clam Bake 2015 - September 10th, 2015 - Late Afternoon. Contact us for details and an invitation.

Click here to see a writeup on a talk we gave at a CFA Society lunch last month:  http://freezingassets.org/2015/04/a-day-in-your-life-well-spent-event-recap-april-10-2015/





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