Equity markets turned in a strong quarter with the S&P500, a widely followed market proxy, returning 6.27% for the quarter. As mentioned in previous letters, we believe that equity markets have strong fundamentals but investment obstacles are growing in intensity. Corporate profits remain near all-time highs, corporate balance sheets continue to show healthy liquidity, and interest rates, while higher than in quarters past, are still low compared to long-run norms. In light of these facts, we believe equity markets are well positioned for continued strength. However, the investment climate is still concerned with the heavy use of debt instruments, the housing sector’s continued decline, the growing budget deficit, weak gross domestic product (GDP) data, elevated energy prices, and a less competitive U.S. dollar.
We believe the short-term data and the daily shifts of the market are given too much weight as each movement is speciously ascribed some deeper meaning. In fact, we believe that the short term movement of the market is, in a sense, fundamentally unknowable in so far as it is impossible to ascertain the buy/sell decisions of an indeterminate number of market participants and the reasons for those actions on any given day. We believe that the most pragmatic approach to investing is to ignore the short-term investment climate and focus on specific businesses instead. The investment team here at Hillman Capital Management looks for a sustainable competitive advantage – a process, culture, or position that we believe affords a company defendable returns. An investment process like ours stipulates that little energy is spent deciphering the recurrent, weekly data. Instead we choose to examine more expansive ideas that affect our long-term outlook or the individual securities we purchase.
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