US equity markets rebounded at an amazing pace in the first quarter of 2019.  Historically it has almost been unheard of for equity market corrections of 15% or more to be retraced at the same or better pace than what occurred during the fall.  This is exactly what occurred in the first quarter of this year.  This obviously has us thinking deeply about what was behind the selloff that occurred in the fourth quarter and whether it was in fact a manufactured correction by hedge funds seeking to make enormous amounts of money through a big short.  We hypothesized in January of this year that the selloff in the fourth quarter was likely due to a big short put on by hedge funds and institutional investors and not likely due to fears from investors worried about a substantial change in the economic environment.  This seems to be what primarily occurred.  Now in hindsight there are some other observations that can be made and clearly more data is available about the economic conditions that were the headline news driving markets lower in Q4. 

It is now clear that the decline in US economic activity has been real but nothing close to the economic collapse or recession that many feared and forecasted and used to drive markets lower.  Much of the slowdown can be attributed to the decline in wealth that occurred in Q4 as a result of the 15 to 20% haircut in the values of equity markets that happened as a result of the big short, and the resulting decline in wealth and consumer confidence.  There were troubling economic events however that unfolded in 2018 that impacted the economy and they involved higher rates from the Fed, higher prices of goods from dueling Tariffs from the US vs China & Eurozone fight, reduced consumption from fragile spoiled consumers and workers, and the problems in corporate America related to tight labor markets. The impact and extent of these economic events are explained in more detail in our research spotlight on page 3 of this newsletter.

The US economy and the globe are benefiting from significantly improved decision-making and wisdom from central banks around the world.  Much has been learned over the last several decades about the use of central-bank policy to lengthen economic cycles and avoid boom and bust type cycles.  As a result we are seeing much longer economic cycles that ebb and flow for 10 years or more before a recession emerges or bust occurs.  This current cycle began in 2010 and we are in the ninth year of this cycle with likely many more years of growth before it ends.  The cycle is clearly ebbing right now after two years of slightly better than trend growth stimulated by corporate tax cuts and the best consumer confidence in over a decade.

Chairman Powell is seen as a new breed of central banker but is really just a central banker with wisdom derived from the failures of his predecessors.  One of the biggest problems facing the US economy is the failures of central bankers beginning with the Greenspan era and ending with Yellen.  These central bankers were too fearful about recession and addicted US consumers on low interest rates.  As a result we have had an asset boom that is the foundation for much of what is wrong in America today.  It underpins socialism, our employment problem, our consumption problem, and our growth problem in general.  Decades of future growth has been pulled forward and as a result the growth on the horizon is modest at best.  We have no prevalent consumption themes in our economy, something that is an earmark of a great growth cycle.  Our assets are highly inflated in value and real estate and housing is out of reach for our younger generation, and as a result they are embracing socialism over capitalism today.

The equity markets bottomed on December 24, 2018 from their highs achieved at or around September 30, 2018.  Hi growth popular growth names fell the hardest (Facebook, Apple, Amazon, Netflix, Google) while the broad market(S&P 500) still came down hard (-20%).  From the bottom there has been a sharp rebound in the names that came down the hardest and highlight the list of best performing stocks since December 24th.  Amazon is up 36% from its low, Netflix 52% from its low.  Amazon and Apple however are still 10% from their highs of September 30th due to investor’s fear of owning highly valued names and still remembering how hard they fell during the downturn. This will undoubtedly resolve itself as investors realize these secular growth names are the place to be even in a slower growing economy. The S&P 500 has now touched its high achieved on September 30, 2018.

MACM portfolios are still 5% from their 2018 highs due to large holdings in Amazon and Apple and a large cash position that was built defensively during Q4.  We are unhappy that we took that large cash Position in hindsight but undoubtedly it was the right thing to do at the time given the fact that we manage retirement money and took action after the correction past the 10% mark.    We expect our portfolio to make new highs over next few months and expect our portfolio to lead the market through the rest of 2019.  We have groomed the portfolio to fit the best names thus far in 2019 and will adjust as needed to stay ahead of the S&P 500.  We have already gained 200 basis points of alpha in Q1 after gaining 200 basis points of alpha in all of 2018.

Risk is clearly back on and asset growth will continue as the economy ebbs and flows for the next few years.  Real estate is moving again after a flat year in 2018.  REITs were the best performer through the last two quarters of equity market volatility and will now ebb as stocks continue to flow.  Europe was one of the worst places to be as socialism and political obstruction became problematic.  China is now in our portfolio as we expect the tariff and global trade problems to move to the back burner during the election.  Global conditions will likely improve along with economic conditions in the US over the next several quarters.  The upside however is modest for growth, but reasonably good, for stock prices.  The rally in treasuries is over as recession is off the table for 2019 and risk is back on.

We remain optimistic about the economy and the markets.