Q1 2019 Letter
April 2019
The world is full of mysteries and surprises. Perhaps nowhere is this more apparent than in financial markets. An informal survey of banter around our office shows topics have changed very little in the last six months. Conversations frequently touch on the same themes as they did when we were half way around the sun: slowing global growth, trade tensions, political uncertainty, Brexit, Fed policy. While the topics of conversation have remained relatively constant, the markets have fluctuated wildly. Coming into the final quarter of last year U.S. equity markets were at or near all-time highs. Then sentiment shifted, and markets sold off sharply into December. The S&P 500 closed more than 19% below its high at one point, nearly enough to meet the technical definition of a bear market. But if anything is certain it is change. As we started the new year we witnessed sentiment shifting once again, and markets have broadly advanced into 2019. The S&P 500 is up 13.6% this year to date through March 31, while small cap stocks are up 14.6%, developed international stocks are up 10.0% and emerging market stocks are up 9.9% over the same period.
One explanation for the dramatic moves we frequently hear is shifting monetary policy. We admit it is sometimes baffling to think the $20 trillion U.S. economy can be swayed by terms like “data dependent” or “automatic pilot”, but the world is full of mysteries and surprises. Ben Bernanke once observed “monetary policy is 98 percent talk and only two percent action. The ability to shape market expectations of future policy through public statements is one of the most powerful tools the Fed has.” In other words, narratives matter. Narratives matter because they influence sentiment, and sentiment matters because it drives the relative eagerness of buyers and sellers. Show us a market where buyers are more eager than sellers and we’ll show you a market where prices are destined to rise.
With global equity markets falling in unison late last year, central bankers set about the task of changing the narrative. Heading into the selloff, the Fed was systematically raising rates and regularly reducing their multi-trillion-dollar stockpile of bonds purchased during the great financial crisis. At one point Fed Chairman Jerome Powell characterized the process as being on “automatic pilot”. Markets sold off after his remarks and he later walked back the comments to emphasize the Fed’s “patience” and “flexibility”. Markets responded in the affirmative. Ultimately, the Fed decided to slow the pace of interest rate hikes and end their balance sheet reduction program earlier than previously expected. European Central Bankers made similar comments regarding their planned scale back of quantitative easing. The change in narrative improved sentiment and global equity markets have continued to advance, at least for now.
Although we follow these developments closely and with great interest, we remain wary given our years of experience. We have learned to be inherently skeptical of anyone who claims to have found a reliable indicator as to which way the market is headed next. There are no magic bullets, especially over the short run. Over the longer term, however, there do seem to be some strategies and approaches with persistent advantages. Names like Warren Buffett, Howard Marks, and Sir John Templeton come to mind, among others who have shown the resolve of a consistent investment philosophy. With near-term market fluctuation shifting dramatically from one quarter to the next, it is worth taking a step back to reflect on what these time-tested, enduring approaches have to offer.
These themes should sound familiar. Understand the costs involved in managing your assets. Be mindful of taxes. Think strategically. If you can’t see owning a stock for 10 years, don’t consider owning it for 10 minutes. Price is what you pay. Value is what you get. Be greedy when others are fearful and fearful when others are greedy. Doing what others are not doing can be uncomfortable at times. Buying when others have despaired, and selling when they are full of hope, takes fortitude. There are bold investors and there are old investors, but there are no old, bold investors. We cannot predict but we can prepare. Hats off to Messrs, Buffett, Marks, and Templeton for these nuggets of wisdom. No matter what happens in financial markets next quarter or next year, we will strive to be guided by these timeless principles as we navigate whatever environment unfolds.
On administrative matters, we have enclosed an explanation of our annual ADV Brochure filing and a separate letter which highlights several tips for preventing fraud. Please let us know if you would like a copy of the full ADV Brochure. Also, please promptly inform us of any significant changes in your financial circumstances that would require revisiting your investment objectives or the management of your assets.
Finally, we are delighted to announce that Betsy Harris and Carey Blakley have become equity partners in the firm bringing the total number of partners to nine. We remain grateful for your continued support as we strive to build a very special and enduring family office. As always, we welcome your thoughts, and appreciate the confidence you have placed in our firm.
Nicholas Hoffman & Co.