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Large Cap Growth

Large Cap Commentary – March 2018

13 April 2018
 The volatility that the markets have witnessed in 2018 was apparent again in March. The S&P 500® Index logged its second consecutive monthly loss. Prior to February of 2018, the S&P 500 had not fallen for a full month since October 2016. While there is some speculation that the world economies are slowing and that is putting pressure on the market, the headline of conversation is trade. First, the U.S. government announced tariffs on imported steel and aluminum. In addition, the United States has targeted China in retaliation against China’s alleged unfair trade practices, imposing tariffs on up to $50B of Chinese imports and threatened to increase that level to over $150B of goods. Not surprisingly, the Chinese have responded by adding $50B of tariffs on the U.S. While there are some who applaud the Trump Administration’s actions and rightly point out that intellectual theft is a real problem with China, markets do not react well to uncertainty and the Administration is certainly adding to uncertainty.

A long time ago I was an economics major at the University of Wisconsin. While most of my economics professors did not agree with each other on much of anything, the one thing they agreed on was the benefits of free trade. What then is the secret sauce to free trade that gets economists of all stripes to agree and why would threatening it create so much volatility in the markets? David Ricardo, in his ‘On the Principles of Political Economy and Taxation’, first published in 1817 (!), illustrated the importance of the comparative advantage of each nation in production. The theory of comparative advantage holds that even if one nation can produce all goods more cheaply than can another nation, both nations can still trade under conditions where each benefits. To use an illustration, let’s assume that an accountant can charge $150 an hour for accounting services and $25 an hour for secretarial services. Even if the accountant is faster at typing and organizing than the secretary, the accountant is better off hiring a secretary to type for an hour than lose $150 in income by not spending the time on accounting services. They both benefit in this instance. The secretary’s comparative advantage with the accountant is in the form of lower cost labor and the accountant’s comparative advantage is in the form of higher cost, specialized labor.

As Dominick Salvatore says in his basic economics textbook International Economics, the law of comparative advantage remains “one of the most important and still unchallenged laws of economics…The law of comparative advantage is the cornerstone of pure theory of international trade.”

How the latest vitriol on trade will play itself out is anyone’s guess. However, one aspect of Argent’s investment process is to consider the operating conditions a company faces as we assess its ability to execute on its business plan. Volatile trade conditions could decrease the odds that a company will realize success. As the uncertainty around trade ratchets upward, we will gauge the potential impact on the stocks in our portfolios and will carefully assess the potentially changing landscape on the companies we are considering for inclusion in our portfolios. In the meantime, we will gear up for first quarter earnings, getting the first glimpse of what type of impact the new corporate tax regime will have on corporate earnings and getting a sense of how 2018 is playing out for Corporate America.

We have four successful equity strategies – Large Cap, Small Cap, Dividend Select and the recently introduced Mid Cap. We are very proud of all, and if you have questions on any of these, or know others who might have an interest in our strategies and mailings, please call us.

 

Ken Crawford

Senior Portfolio Manager

Past performance is no guarantee of future results. Views expressed herein represent the opinion of the portfolio manager as of the date above and are subject to change. The information provided in this report should not be considered a recommendation to purchase or sell any particular security. You should not assume that investments in any securities within these sectors were or will be profitable. A list of stocks recommended by Argent in the past year is available upon request.