Large Cap Commentary-March 2019
I am going to step out of the usual monthly update to talk about results from the first quarter of 2019 and contrast them with what we saw at the end of 2018. Per FactSet, a financial data provider, the S&P 500® Index in the first quarter of 2019 posted its biggest gain since 2009 and its best start to a year since 1998. That’s pretty impressive in and of itself, but the result is particularly impressive given the abysmal fourth quarter of 2018. Here is a quote from CNBC on December 31st of last year, ” For the first time ever, the S&P 500 Index will end the year with a loss after being positive for the first three quarters. The benchmark index was up nine percent through the first three quarters of the year. Then the October sell-off began. The S&P 500 fell seven percent in October and accelerated those losses this month, in what is likely to be the index’s worst December performance since the great depression.” Certainly that quote and the market’s result did not herald good news for 2019.
So this begs the question, ‘what changed?’ The short answer is we do not know, because the period is too short for analysis. We, at Argent, look at the market every day and analyze how the stocks we hold in our strategies have performed, good or bad. That is our job and our myopic focus is warranted. But short-term changes in the market frequently are just that- short-term, and to react to those short-term changes can lead to perilous results for an investor. That is why we preach long-term investing, when sustaining trends reveal themselves and reinforce themselves. We will take as company Warren Buffett, who espouses a similar time span for investing.
Given that, are there any sustaining changes for the market? Again, the answer is unclear, but I would reply with a definite ‘Maybe.’ One of the biggest changes in my mind, from the fourth quarter of 2018 to the first quarter of 2019 is the change in tone from the Federal Reserve and the consequent drop in interest rates. Recall in November of 2018, the yield on the 10-Year Treasury bond was 3.2% and the Federal Reserve was saying interest rates were below the normal rate. Fast forward to today, the 10-Year Treasury yield is 2.5% and the Federal Reserve is indicating further changes to interest rates would be ‘data dependent.’ As we have been arguing recently, economically sensitive companies, those that benefit more from growth and that are hurt more from a recession, have been laggards in the market and have compelling valuations. It is those stocks that would be primary beneficiaries of a shift by the Federal Reserve to a more benign monetary policy. This is because an accommodative Federal Reserve would provide stimulus to the economy, increasing the odds that the economic cycle would be extended, thus aiding economically sensitive companies in particular.
How the rest of 2019 will play out is yet to be seen, but at the very least the year is off to a very good start. We have four successful equity strategies – Large Cap, Small Cap, Dividend Select and Mid Cap. If you have questions or know others who might have an interest in our strategies and mailings, please call us.
Senior Portfolio Manager