News & Our Thinking

Quarterly Investment Commentary

Argent Quarterly Investment Commentary – March 2019

23 April 2019

“Nothing gives one person so much advantage over another as to remain always cool and unruffled under all circumstances.
– Thomas Jefferson


Staying cool and unruffled in late December of last year was not easy.  The average U.S. stock had dropped 20 percent over the prior eleven weeks and investor confidence was deteriorating rapidly.  The Fed had just indicated that more interest rate increases were on the horizon and trade negotiations with China had stalled.  To top it off, President Trump and Congress were at odds and the government was poised for a January shutdown.  It seemed the dreaded “R” word – recession – was a real possibility.

As quickly as it arose, however, negative sentiment dissolved, with the first quarter of 2019 turning in its best results for stocks in a decade. Returns, on average, were in low double-digits and Argent portfolios had very good results.

What changed so much to induce such wild swings over a six-month period? Honestly, not much, although an abrupt about-face in the rhetoric of Fed Chairman Jay Powell was probably key.  Powell went from December comments implying that interest rate increases were on auto pilot to a January statement which made a 180 degree turn, and signaled interest rate increases were off the table for the balance of 2019.  As a result, concerns that the Fed might increase rates too rapidly dissipated as quickly as they had been created.

As we evaluate the landscape for investments entering the second quarter of 2019, we are pleased that most portfolios have recouped the paper losses incurred in the fourth quarter of last year.  While the government shutdown in January did depress some economic numbers in the first quarter, U.S. stocks held up well.  Their rally, however, causes the average U.S. large cap stock to now trade at 16-times projected 2019 earnings, a fair – not too high, not too low – multiple for our low interest rate environment.  Indeed, much of the economic story in the U.S. continues to be good.  Employment is strong and the labor market tight.  There are flickering signals of wage growth that we have not seen for a decade, and most businesses are doing well.

Nonetheless, pockets of recent economic news is less than inspiring.  Auto sales are not bad, but have weakened; home sales are okay, but not great, and first quarter corporate earnings candidly were soft, with sales and profit margins for many U.S. businesses under pressure.  None of this is sounding alarm bells, but we will be monitoring these trends closely in coming months.  In addition, the government bond interest rate yield curve “inverted” for a time in the first quarter, meaning short-term interest rates rose above longer-term rates.  This is historically a warning sign for a cooling economic outlook.

Former U.S. Senator Phil Gramm stated recently in the Wall Street Journal, “If your income comes from milking the cow, you need to keep the cow healthy”.  With that in mind, we hope to see the U.S. finalize trade negotiations with China quickly.  It would provide businesses with certainty as to the “rules of the game”, making it easier for business leaders to justify expenditures on plant, equipment and acquisitions, something vitally important in sustaining long-term economic growth.

We end with the reminder that it is important to resist getting caught up in current headlines, that time has a way of rewarding investors. Warren Buffett wrote in 1989 – thirty years ago – that he had “no idea where the stock market, interest rates or business activity would be in a year”, but that he was confident that time would prove his investments sound.  Let’s look at what happened over the next 30 years, a period which included two of the three biggest stock market corrections in history:

  • On February 28, 1989, the S&P 500 Stock Index closed at 288. On December 31, 2018, it closed at 2,507, close to nine times where it was in 1989.  This does not include the impact of dividends.
  • The cash dividend for the S&P 500 for the full year 1989 was $11.73. For the full year 2018, it was $53.61, a little over four and a half times what is was in 1989.

To get a sense of how these increases compare to inflation, the Consumer Price Index (CPI) stood at 122 in February 1989, and at 253 in December, 2018.  Thus, inflation only doubled over that time. The moral of the story for us is straightforward.  We will stay “cool and unruffled”, and in the end likely find ourselves profiting handsomely.


(c) 2019, Argent Capital Management

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