Review & Outlook
January 15, 2019
Last year’s outlook at this time ran into a significant setback at the start, but then rallied strongly to top the old highs by summer. With a fourth quarter denouement that stretched into bear market territory for the first time in a decade, we find it hard not to look at the whole of 2018 as other than a classic blow-off double top. And yet the inability of sellers to drive oversold markets towards more painful discounts relative to fundamental value suggests important positives remain.
With the first weeks of the New Year complete, we’re delighted to see a bit of relief from the steady downbeat of 2018’s year-end that turned nine months of progress into mud. And while a few days might not seem much to hang one’s hat on, it’s a start, and we’re glad to find a more positive note in the suggestion box for 2019.
Last year’s outlook at this time ran into a significant setback at the start, but then rallied strongly to top the old highs by summer. With a fourth quarter denouement that stretched into bear market territory for the first time in a decade, we find it hard not to look at the whole of 2018 as other than a classic blow-off double top. And yet the inability of sellers to drive oversold markets towards more painful discounts relative to fundamental value suggests important positives remain.
Odd as it may seem, salient among the positives may in fact be the very current acidic tenor to much of the news we commonly bemoan. Looked at from this perspective, the acrimony may measure no more and no less than a palpable sense that we are overdue for an economic reset to the balance between equity and efficiency, and the time of choosing is close. Elsewhere these choices are similarly playing out in the high stakes seen in Brexit, the Eurozone, and the slowdown weighing on China’s Communist Party, people and private sector. But here in the U.S. the choice looks increasingly to run along generational lines where natural ties seem to offer a better shot at ultimately bridging similarly scaled differences. Done right, the reset promises a healthy shift in demand that lengthens investment horizons as well.
Our bottom line is less ambitious. If the recent retreat stabilized due to continuing economic strength, it’s also true that the bright long-term outlook contributed as well. Here, we are enthusiastic that the mature unfolding of technology more broadly within industries could widen benefits and re-invigorate growth across the entire economy, ultimately rebuilding the middle class in ways not seen since the “greening of America” after World War Two. For another, we see potential for a fruitful change in share ownership structures as well. All of this suggests we’ll ultimately see a return to normal that’s neither a one-off nor a fantasy, but a real investor’s environment – even re-establishing traditional risk premia.
With our practice of multi-year holding periods, the prospect for “normal investment” to come back into vogue suggests the crowd may come our way. Much as we like the thought of this, it could well mean that we’ll want to see a broader resurgence in public offerings to assure that popularity doesn’t limit opportunity. There’s a lot that can slip between the cup and the lip, but for now, that’s how the pieces look to fit together.
As always, we welcome your calls and look forward to the opportunity to discuss your progress.
James W. Mersereau, CFA, CIC
President
Daniel A. Kane, CFA, CIC
Managing Director