INTRO:
I am launching our first monthly investment letter after the worst month the market has seen all year. The purpose of this letter is to provide some insight into my thought process on stocks, the market, and the economy. I will also spend more time discussing data than speculating on an uncertain future. Market speculation is rampant, and a focus on facts over fiction is more important than ever.
I have a long term view, but will always look to use market fear and greed as opportunities to add alpha to portfolios…by either harvesting profits for winners that no longer offer as much alpha going forward, or adding to positions when indiscriminate selling provides discounted prices.
October 2018 Investment Letter
To Our Investors and Observers,
The S&P 500 sank 6.9% over the month, and would have been closer to 10% had it not been for a market rally over the last two days of the month. Oil prices didn’t recover, and fell 13% for the month. The 10 year Treasury Bond, the best proxy for interest rate impacts on the economy, moved up 10 basis points to 3.15%. Our favorite growth proxies, the Russell 1000 Growth and Russell 2000 Growth indexes, fell 8.9% and 12.7% respectively. This performance was the worst the market has experienced since the summer of 2011.
There are many reasons why this may be happening. The market has become fearful over interest rate increases (which appear minor to me), the prospects for slower growth or recession brought on by a trade war, and fears surrounding the political future of the country. One of these concerns will be resolved on Tuesday of next week, and most likely will lead to a relief rally. The trade tariffs started impacting companies at the end of September, and despite modest changes to earnings guidance (so far), industrial companies like Caterpillar, United Technologies, and 3M sold off on fears that tariffs could significantly impact profits in the future.
Not every stock performed poorly last month. Tesla (TSLA), the leading manufacturer of electric vehicles and our favorite auto manufacturer, was up 27% for the month. Against many Wall Street views to the contrary, the company produced a record amount of vehicles, revenue, profit, and cash flow! Tesla will remain controversial, especially given its mercurial leader. Still, I am impressed with the results….and will look for more of the same in the future.
There were a few other stocks that moved up during the month, but were predominately defensive consumer staple businesses like Coca Cola Company (KO) and Procter and Gamble (PG). For the sake of future economic prosperity, let’s hope Washington and the White House settle this trade war quickly.
As the market declined, I added to positions that I think are undiscovered. Conversations with other investors (that were generally unaware of these businesses) suggest I may be on the right path. I believe undiscovered revenue and earnings power is the fuel to higher stock prices….I think it generally reveals itself during earnings season, and often leads to out sized moves in stocks. As we move through November, the elections and earnings season will end, and hope surrounding 2019 should begin to help stabilize and then advance the market. Although I don’t know if the worst is over, I think we are making our way through this phase of the market.
All the Best to You,
AKW