Strategic Update - Navigating the Course Ahead

After rising 6.1% through March 1st, the S&P 500 has tacked on exactly 2 points since.

We view this as a sign of quiet strength.  For the most part, the markets have yawned off a Fed rate hike, the uncertainty of a tax bill, the firing of the FBI director, weaker than expected first quarter economic growth and sabre rattling which has included MOAB bombs and repositioning Naval fleets.  Typically this litany of horrors would have the market diving for cover. 

Not all the news has been dark and gloomy.  First quarter earnings are on pace to post a 12% growth rate over last year’s Q1.  Roughly 2/3 of the companies have beaten earnings estimates and over half have beaten on sales.  Employment numbers continue to gradually improve, US industrial production has been strong, home sales are near their post-recession highs and consumer sentiment is at its highest point since January 2007.  Looking ahead, we see several green shoots of a synchronized global recovery.  The European Union may not disintegrate after all, and emerging markets have rebounded smartly. 

These cross currents of events has created a market that is acting like a Zen master on Prozac.   The VIX index, a measure of market volatility is trading below 10 for only the 20th day in the last twenty five years.  By comparison, at the height of the 2008 financial crisis, the same index read 72.67.  Some are fretting that the market’s complacency is an ominous sign.  We are not.  Historically, markets have typically been higher on average in the one and three months following such sanguinity.  <As a side note, the above photo is Kodo Sawaki, one of the most highly regarded Zen masters of the 20th century.  Our analogy in know way implies that he was on Prozac>. 

We have been pleased to see more individual stocks acting independently from the market.  Active management and security selection is paying off, as we have been suggesting for months.  Future market gains will largely depend on earnings and dividends as it is hard to imagine valuation multiples expanding much from here.  In fact, the market in general may not move much from current levels through the rest of the year. 

All of that plays well with us as we continue to find opportunity underneath the market’s placid surface.  Our earlier conviction in tech stocks left behind in the Trump rally has paid off as the market has rotated back that way.  We are currently sifting through the rubble of the retail sector which has been decimated by the Amazon bomb in search of an oversold gem.  (Happily, Amazon has long been one of our largest holdings.)

It would not be unusual to see the market pull back sometime this summer.  We would view that as an opportunity to add to equity exposure.  As we have previously highlighted, stocks decline 5% - 10% every couple of years.  But, more serious bear markets have never started without being forwarded by an inverted yield curve (where the 2 year Treasury rate is higher than the 10 year) an indication that the future will be worse than today.  Although that indicator has narrowed a bit, it still stands comfortably in positive territory.

As we navigate the course ahead, our differentiating strategies will always be:

  1. As a fiduciary, the best interest of the client is ALWAYS the driving factor behind any investment decisions.
  2. Maintain diversified portfolios allocated to match the objectives and risk tolerance of the individual client.
  3. Focus on individual investments rather than the overall markets. 
  4. Stick to fundamental research on quality, valuation, and technical analysis to find the right opportunities at attractive prices at the right time. 
  5. Invest where the upside potential solidly outweighs the downside risk.


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