By: Ivan T. Thornton, CEO of Fiduciary Management Group, LLC
Published: March 3rd, 2019
What a Difference a Quarter Makes
We closed out of Q4 2018 licking our wounds. As mentioned in the previous Newsletter, the only good thing about the quarter is that it marked the end of a volatile and negative performance year. For review, some of the headlines from 2018: “Worst Week Since 2008,” “Worst Month Since 1998,” “Worst Quarter Since 1931,” “Worst Year Since 2008.” But oh, what a difference a quarter makes!
Q1 2019 opened with a bang. U.S. domestic markets opened up the year with a nine week winning streak. The S&P 500 had its best first quarter since 1998. The NASDAQ, led by the Tech industry, had a stellar performance having its best first quarter since 2012, and the Dow Jones, led by large blue chips had its best first quarter performance since 2017. In all, the S&P 500 ended the quarter up 13%, the NASDAQ up 16.49%, and DJIA up 11%. This was a dramatic turnaround from the way Q4 ended and provided investors with renewed belief that the long running bull market was still intact. We stood our ground during the market meltdown and assured clients that “this too shall pass” and that “brighter days were ahead.” As painful as the meltdown was, we reminded you that we manage money for the long term and try not to get caught up in the ups and downs that market volatility brings. Though painful at times, volatility is a good thing. It provides by opportunities on the downside and exit opportunities on the upside.
So, what changed? As we entered January we suggested that the markets were in an oversold position. After all, the Q4 market meltdown had exceeded “correction” levels - defined as a 10% decline from the top level - as many indices had entered “bear market” territory - defined as a 20% decline from the top level. Year-end tax loss selling was behind us and we suggested that the markets, by most measures, were nearing a bottom. The Federal Reserved pulled back from its stance of increasing interest rates and some have even suggested that we may see an interest rate cut (we think not!) given the slowdown in the economy. Corporate profits came in strong and there were clear signs that trade tensions between the United States and China had begun to ease. There were still some challenges in the beginning of the year: The Federal Government was still in shutdown mode, the power shift in Congress was just getting started, and the long awaited Mueller Report was expected, with many assuming that it would bring great discord in the Nation. However, being contrarian, we advised that clients take advantage of market weakness given what we saw as oversold valuations in certain areas. At a given point and time, we simply believed that the market would soon experience a strong rally. Our goal was to make certain that our clients were in position to take advantage of it. We have been well rewarded.
We enter the second quarter cautiously optimistic that the markets will continue to rally. Many investors – particularly those that sold during the 4th quarter 2018 meltdown – will rush to put money to work out of fear of missing this movement. They will find comfort in this strategy, given that the markets have yet to reach the levels they traded before the meltdown, signaling that there is still room to run. There is increased optimism that the U.S. and China will soon conclude trade talks on a positive note and an agreement will be reached. As well, many believe that the Nation dodged a bullet from the Mueller Report, as it appears that the country will not be thrown into chaos. Both good reasons for markets to rally. However, the markets took a hit in late March as the bond market signaled that a recession was likely (inverted yield curve). We do not believe that a near –term recession is eminent. We anticipate that the economy will continue to grow and expand, albeit at a less robust rate. Q1 corporate earnings are expected to come in soft, reflecting the Government shutdown, as well as, the economic slowdown that was precipitated by cautionary spending during the meltdown. So while we believe the markets will continue to rally near term, we anticipate a more normalized investment environment for the remainder of the year, barring any unforeseen catalyst. Fear not, for within a normalized investment environment, opportunities abound. Our goal is to find them and put them to work for you! We will be on the lookout for situations that could possibly move the market up or down and thus create buy or sell opportunities that we can take advantage of. Overall, the domestic economy remains solid, unemployment low and inflation in check. The international markets look to be on a rebound led by no other than China.
Finally, I would be remiss if I did not discuss the heightened attention focused on the slew of Initial Public Offerings (IPO) coming to the market this year. First up was Lyft, Uber, Airbnb and many others coming soon. As long term investors, we’ve always approached IPO’s with a bit of hesitation out the gate. We have found that bargains can be had once the “fast money” (traders) have exited the positions and the stock price falls below the original IPO price. This strategy has worked well for us over the years and I see no reason to change now.
Although we utilize a Model Portfolio structure, each account at FMG is independently managed and structured in accordance with each individual client’s goals and objectives. We invite you to contact us directly to discuss your particular situation. As always, we thank you for your business and loyalty.
By: Ivan T. Thornton, CEO of Fiduciary Management Group, LLC
Published: January 2nd, 2019
Year End Review: What a Year it Was
The only good thing is…….it’s over! Good riddance!
Let’s review the attention grabbing headlines of 2018: “Worst Week Since 2008,” read one. “Worst Month Since 1998,” read another. “Worst Quarter Since 1931,” read yet another. “Worst Year Since 2008,” and finally, “Worst Christmas Eve in History.” Geez! With these types of headlines, there is no wonder why we all feel plenty of financial anxiety. Though we’ve been through this before, it’s never any easier the next time around. Though painful, these market gyrations are quite the norm. Markets move up, down and sideways for many economic, financial and political reasons. Last year’s volatility felt unusual because 1) we haven’t experienced negative market volatility since the 2008 so we’ve been spoiled by the good times, and 2) this market volatility is so vociferous!! Be it the 24 hour news cycle (thanks to the internet) or a cantankerous political environment, it appears that all market moving news is on blast. So, what exactly is going on?
Plenty! One thing that we can agree is that there is no one culprit. The markets have faced a wall of worry from many angles: the trade war between the two largest trading partners - let alone the two largest economies in the world, the Federal Reserve interest rate hikes, the disclosure of Technology companies’ misdeeds, perceived political instability both here and abroad, the government shutdown, the global economic slowdown, algorithmic trading (computerized trading) etc. The net result is a negative economic and financial environment showing up in the markets’ 2018 performance: DJIA – 5.63%, S&P 500 -6.24% and International -13.79%. Although we have long called for a market correction, we were hoping for an orderly one. This correction has come with plenty of calamity as a result of the aforementioned challenges. And, the market meltdown has exceeded “correction” levels - defined as a 10% decline from the top level - as many indices entered “bear market” territory - defined as a 20% decline from the top level. Individual companies, many which have been high performers, are down even more than 20% from their highs. Most European markets ended down greater that 20% for the year and the Developing and Emerging Markets fared even worst. All very painful. During these times, I often get the question “why not sell now and buy back later.” Technically, that is a strategy referred to as Market Timing. In my thirty years of managing money, frankly, I have never seen a successful Market Timing strategy. For starters, we really never know the market is going down until after…..it has gone down! How much further it will go down is anyone’s guess. Not a good way to manage money. To add to that, almost no one ever actually buys back in a timely fashion. And worst, if the market goes higher than where the Market Timer sold, he or she will almost never get back in, ultimately missing the rebound. We also discourage market timing because it could result in negative tax ramifications as it relates to accounting for long-term and short-term capital gains. So, if it seems like we are doing nothing during these tumultuous times, you are right! That is part of the strategy. We manage money for the long term and try not to get caught up in the ups and downs that market volatility brings. We maintain an investment discipline that focuses on long term quality companies we invest your money in. Yes, negative volatility brings anxiety, but it also brings opportunity. So, at the least, we stay calm during market downdrafts, and at best, we take advantage of the lower stock prices that down markets create. We can seek solace and comfort in the positives that we see: Strongest U.S. GDP in 20 years, lowest unemployment in 50 years, record corporate earnings, best retail selling season in 6 years, etc. We also seek solace and comfort in the top quality companies we recommend you invest in. Just solid businesses that create and/or sell goods, or provide services that add value to the consumer.
Lastly, during times like last year I often ask, ‘What would Warren and Jack say?’ Warren, being the venerable investor Warren Buffet, and Jack, being John Bogle, founder of Vanguard, whom Warren refers to as the greatest investor ever:
“The idea of that a bell rings to signal when investors should get into or out of the market is simply not credible. I do not know of anyone who has done it successfully and consistently……The true investor will do better if he forgets about the stock market and pays attention to his dividend returns and to the operating results of the companies he owns Owning the stock market over the long term is a winner’s game.” Jack Bogle
“Price is what you pay, value is what you get…..I like buying quality merchandise when it’s marked down……If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes. Put together a portfolio of companies whose aggregate earnings march upward over the years, and so also will the portfolio’s market value. when we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever.” Warren Buffet
So we enter the New Year with the markets in an oversold position. Tax loss selling is behind us and many “talking heads” are suggesting we are at or near a market bottom. Retailers are already reporting a strong selling season and economic data regarding the economy is showing continued strength. All sounds quite bullish, however, we remain cautious near term. The Federal Government is still shut down. The power shift in the Congress may prove to add to the drama and discord. And accordingly, the Mueller Report is said to be out some time in the first quarter. U.S. and China trade talks are still thirty to forty days away and the Federal Reserve has already hinted at yet another rate hike. Although we believe much of the doom and gloom is already reflected is stock values, we remain hesitant until the aforementioned is behind us. However, we are putting money to work in certain areas. At a given point and time, we believe that the market will experience a strong rally. That rally may be short lived as nervous investors will use the strength to exit positions. Then there is heightened talk of a recession. We don’t necessarily believe that a recession is eminent. However, we do believe that a “soft landing” is in the cards. After all, the economy is pretty much firing on all cylinders.
An economic slowdown would be quite normal. Stay tuned, and know that we are here to provide guidance.