June 4, 2019
Following a very strong four-month start to the year, markets have given back some of these gains during the month of May. Although one never enjoys the experience of weak markets, sentiment was beginning to get frothy during the rally (although not as frothy as this time last year) and we are more comfortable when the expectations of market participants remain tempered. What sparked the new bout of volatility will be chalked up to a collapse in the trade negotiations between the US and China, although it may also be as simple as stocks were due for a correction after appreciating meaningfully in a short period of time. The S&P500 fell almost 7% during the month of May, which suggests investors are concerned, but we don’t yet see the sort of panic that presents us with very attractive buying opportunities. During the recent rally, we trimmed some exposures and shifted towards more defensive names, but in a market sell-off, all stocks are usually hit to some extent – ours included.
With respect to the US/China trade war, the potential disruption of worldwide supply chains has caused alarm – particularly for trade-dependent companies, industries and countries. There are varying opinions as to which country is better positioned for a trade war: the US or China. However, as a well-known Nobel Prize-winning trade economist recently pointed out, US-China trade represents less than 1% of global GDP. As such, this trade spat may not affect the global economy as much as feared. These sorts of macro issues make plenty of headlines, but they are outside of the control of individuals who, unfortunately, often make panic investment decisions as a result.
We try to stick to what we can control, and that is pursuing a value-based investment philosophy. We fully expect the environment to be volatile, but a long-term view and a flexible approach should vastly increase the odds of a desirable outcome.