Peloton 2016 Q2 Recap

One week. That’s how long it took U.S. stock markets to recover to from the surprise Brexit vote selloff. After a sharp two-day decline triggered by Britain’s June 23 vote to leave the European Union, markets rebounded by the end of the week and closed out the quarter with barely a Brexit blemish.

First quarter volatility caused gyrating oil prices and gave way to uncertainties surrounding geopolitical issues in Q2, but the pattern of modest quarterly gains for stocks repeated. The S&P 500 added 2.46% to the 1.35% it gained in the first three months, which puts the index 3.84% higher at the mid-year point. Bonds also rallied as sharply higher oil prices relieved pressure on the energy sector facing potential defaults.

We penned pieces in both quarters outlining Peloton’s strong opposition to market timing (generally) and urged investors not to push the panic button during either of the most recent selloffs (oil in February and Brexit in June). The key for Peloton is to look at the underlying fundamentals of the stocks we own and determine whether certain events realistically alter the value of or outlook for specific companies. In the short term, traders trade to capitalize on volatility, but for longer-term investors, selling into these dips is purely reactionary and usually a money losing strategy – as we saw in both of these cases.

Since June 30, markets have pushed even higher – setting a series of consecutive new all-time highs the week of June 11. When people start hearing about new “highs” for stocks, the simple inclination is to assume that markets are potentially too high simply because prices have risen. That’s not necessarily true. It is important to distinguish between price level and valuation.

Just because prices are higher than they were doesn’t mean that stocks are necessarily more expensive. In fact, if the fundamentals are improving faster than prices are rising, stocks can actually be cheaper (from a valuation perspective, which is the important measure) even though prices are higher.

The key point, as we look at the balance of 2016 and begin to think about next year, is that economic fundamentals remain constructive and are generally getting better, not worse. Of course incremental changes in the economy or with regard to fiscal, monetary, or regulatory policy will affect stocks, but many larger positive trends are in place – including employment, housing, and consumer spending.

Yes uncertainties remain – particularly as the race for the White House heats up. But as we’ve argued for years, uncertainty is a constant, and stocks can perform well in the face of all sorts of unknowns. As stock investors, we own pieces of real operating companies that evolve, change, and adapt to various business and economic climates. Looking forward, for the most part, we believe the environment is generally supportive of stock prices even at new highs. It is doubtful the either presidential candidate, nor the Federal Reserve for that matter, will significantly undermine this dynamic.