Review & Outlook

With a strong recovery in prices off December lows pushing the S&P500 index up 13.6% to define the first quarter of 2019, we were gratified to see our own holdings perform even better. But there’s always a second act to consider. With valuations now perched high above a spreading landscape of unappealing alternatives, we find ourselves pondering whether our next step is déjà vu or a more appealing breakthrough to new highs.

For this measure, weak economic growth reports coming in for the first quarter look to be noise related to the ill-starred government shutdown, and subsequent readings should affirm a more positive underlying tone. Yet at some point, capacity limits, full employment constraints, and a breath of cyclical inflation lie ahead. If economist Steve Keen is right to suggest today’s labor markets will signal wage pressures with a jolt rather than a gentle upward turn, then we could see the ride get a bit bumpy. This in turn could trigger a dose of dissatisfaction as investors long accustomed to smooth sailing find rising volatility and disappointment instead.

Yet in our corner of the market, as much as we like finding so many new investors (increased market support) in our stocks, it is frankly starting to seem a bit crowded. And the odd thing about this crowd isn’t that they like high quality growth issues per se, as much as their ability to barbell these as an offset to their other, higher risk holdings. With reports that 80% of the money flowing into new and unprofitable public offerings in 2019 with expectations as “industry disruptors”, there’s a good probability the only disruption these companies will deliver could be their shareholders’ pocketbooks. In turn, these same shareholders could end up covering their losses by selling their winners – our stocks, and thereby make their problems ours. The point is that pure speculations elsewhere can and do ultimately change the character and risks we face in our own sound investments.

Whether or not our long-term stock holdings have morphed into a new “Nifty Fifty” category like those of the early 1970’s, we’re wondering more broadly whether the markets have initiated an extended topping process akin to that of the same era as well. Three market tops in less than 18 months might not be a coincidence. Keeping in mind that like Dr. Seuss’s Yertle the Turtle, the appearance that there’s always room for one more in a stack holds only until someone else complains or stumbles, wants out and the whole comes tumbling down. And when there’s no easy out, vigilance is a right first response.

For now, there’s thankfully a difference between micro and macro effects, and a whole that is more than the sum of its parts. Experience counts for something, and if there’s one humbling lesson, it’s that no matter what happens over the short or longer terms, a generally upbeat economic demeanor feeds more positive outcomes than we’re entitled to expect. Given the luxury of time, all our worries, unfavorable metrics, and even adverse valuations fade.

As imprecise as the business of investing may be, it remains generally rational. In our practice, following our disciplines, alternating between tight and loose tolerances, and making incremental changes in part or whole, allows us to follow market trends while maintaining risk exposures that produce consistent results. So for now, there’s a measure of satisfaction in seeing a bespoke, active process delivering good results, a path for keeping surprises positive, and a prospect for rational future returns in a world increasingly less so.

With your reports this quarter-end, you’ll find our latest filed copy with the Securities and Exchange Commission of our Form ADV for your review. As always, we invite your calls to inquire further regarding your portfolio or to discuss changes in objectives and circumstances and their impact.

Warmest Regards,

James W. Mersereau, CFA, CIC
President

Daniel A. Kane, CFA, CIC
Managing Director