July 2019 Month-End Letter

The S&P 500 continued a modest uptrend in July, gaining 1.3%, to close at 2980, producing a year-to-date gain of 18.9%, well in excess of the very small gain so far in overall corporate profits.  Nearly all of our holdings exceeded Wall Street consensus projections for both revenues and profits.  Extremely rapid money supply growth has kept bond yields under pressure and enabled equity valuations to expand.  At month-end, the 12-month forward P/E ratio of the Index stood at about 17.5.  While not dangerously high, given the current level of interest rates, investors should recognize that equities are no longer undervalued at present.  A strong quarter to quarter gain in household consumption coupled with a sharp increase in Government spending enabled second quarter total GDP to rise at a 2.1% rate.  In fact, Real Final Sales to Domestic Purchasers rose 3.5%.  However, business investment, foreign trade, and residential construction were all weak.  A strong dollar, the Boeing shutdown, weak economies abroad and the trade war with China are all weighing on the various manufacturing sectors.  In our judgment, there will not be a resolution this year of the trade/tariff war with China.  This will weigh heavily on global growth until there is a satisfactory resolution.

In an effort to stave off further weakness, the FOMC reduced the Federal Funds rate by one quarter point to a range of 2.00%-2.25% on July 31st, and signaled that further cuts could be forthcoming if deemed necessary.  In addition, the Fed indicated that its balance sheet reduction program will come to an end in August, two months earlier than expected.  We are skeptical that further easing of monetary policy will be of much benefit, since household consumption is not likely to increase at an even faster pace, and as long as growth in China, Europe and Japan, all interrelated, is sluggish, the manufacturing sectors will remain weak.  In this environment, the Fed's 2% inflation target is unlikely to be reached given the impact of globalization, technological advances, and fierce price competition from a vast array of disruptors.

Despite meager profit gains, the stock market has already given investors terrific returns this year, albeit driven by a small number of tech-related giants.  These companies have become generously valued, to say the least, as investors are willing to pay up for secular growth in an economy that is growing slowly.  The equity market is ripe for at least a pause during the remaining summer months, if not a more significant correction.  Since our foremost obligation to our clients is protection of their capital, we have lately been moving to a more defensive posture for the intermediate term.

June Monthly Letter

Following a 6.6% decline during May, the Standard & Poors 500 Stock Index enjoyed a 6.9% recovery during June.  In our May letter, we noted that without exception, every one of our portfolio holdings met or exceeded their targets for first quarter revenues and profits, as forecast by a broad consensus of Wall Street analysts.  Accordingly, despite the widespread decline, we made no changes in our positions, for which we were rewarded as the Index rebounded to an all-time high at the end of June.  

The second quarter is now complete, and during the next few weeks, corporations will report their Q2:19 results.  Because a number of data releases during recent weeks have pointed to a slowdown in the entire global economy, including the U.S., we do not expect particularly robust results, but there are already a few signs that the U.S. and other major economies are bottoming out.  Accordingly, revenue and profit results in the second half of 2019 should see an improvement, and overall valuations seem reasonable especially in light of the current level of interest rates.  More important, our holdings encompass the fastest growing sectors of the U.S. economy, including technology, healthcare, social networking, etc.  In the meantime, as we have discussed previously, the financial markets will continue to be volatile, as investors must contend with a raft of geopolitical factors, including the tariff wars with China and the EU, plus the cockeyed proposals being put forth by candidates for the Democratic nomination for president.  In addition, there are the ongoing tensions with Iran and North Korea, and the likelihood of a "hard Brexit," as well as the crisis on our southern border.

Nevertheless, investors should bear in mind the remarkable ability of our major corporations to adjust and adapt to these distractions, and the continuous evolution of technological advances that continue to create new and significant investment opportunities.  We remain highly convinced of the profitability and growth potential for our major holdings and expect no significant changes in our portfolios over the months ahead.  Needless to say, if circumstances warrant, we will communicate our thinking promptly to all clients.