The Tufton Viewpoint, Spring 2018

by Chad Meyer

For much of the last year and a half, the investment community reaped the fruits of a truly odd phenomenon. While the world changed dramatically (and often, it seemed, without warning) the market stayed much the same. Beset by uncertainty on all fronts, the financial story of 2017 was one of growth that simply wasn’t bothered with the rest of the world’s worries. As the headlines zig-zagged from one controversy to the next, nearly every major index went up and to the right.

As the saying goes, you don’t know what you got ‘til it’s gone. In the first three months of 2018, the Dow Jones Industrial Average dropped 2.0%, while the S&P 500, turning in its first quarterly loss since 2015, fell by 0.8%. Of course, more telling than the numbers themselves was the bumpy path that produced them. Writing in this space last spring, I noted the market’s “historically low levels of volatility.”  By contrast, the S&P rose a stunning 5.7% this January, only to sink more than 3% in February, and went up by 2.7% on March 27th, only to shed 1.7% the very next day. When it comes to the era of low volatility, it appears history has moved on to the next chapter.

To the extent it counsels for caution, as opposed to outright doom-and-gloom, we believe this sea-change in sentiment merits our attention. Indeed, with the current economic expansion set to become the second-longest in American history next month, the need for prudence in capital allocation has never been greater. But taking a close look at fundamental, rather than sentimental, indicators of the American economy, we firmly believe that while prudence is wise, passivity is not. Corporate earnings, the linchpin of the bull market’s nine-year run, are expected to post 17% growth for the first quarter, with technology firms (the same ones much-maligned in the press) leading the pack. Coupled with an anticipated tax-cut related increase in corporate spending, and set against the backdrop of continued “synchronous” global expansion, we believe this momentum bodes well for U.S. equities as we move deeper into 2018.

More particularly, we believe it bodes well for you. As the “volatility vortex” continues to deliver wild, headline-driven intra-week swings, our team will be able to strategically add to high-conviction positions—and enter into new ones—at price levels that simply weren’t available in 2017. And though we do not, by any stretch, welcome corrections of any length or degree, we are heartened by the knowledge that historically, our conservative, value-driven approach has performed best in bearish market climates. Whether or not the storm clouds that drifted over the market this past quarter disperse, darken, or do anything in between, we remain confident in our ability to continue the protection and growth of your hard-earned capital.