Quarterly Update

Quarter Ending September 30, 2019


The Whistler Asset Management (WAM) Tactical Equity Portfolio finished the third quarter up 2.4%. HCP Inc., a company that invests in healthcare-related real estate, and Mastec Corporation, which is an infrastructure and construction services company, were the strongest performing positions during the quarter.

Market News

Stock markets rallied to new highs at the beginning of the third quarter as hopes for Federal Reserve interest rate cuts propelled markets higher. When the Fed announced it was not on a preset path to lower rates, markets began to fall. In addition, the U.S. President announced that the administration would be imposing 10% tariffs on $300 billion worth of Chinese imports which would go into effect at the beginning of September. The news was not taken well by stock market participants and stock markets moved lower.

Markets remained lower throughout August as trade tensions increased. In retaliation for the U.S. tariffs, China announced countermeasures in the form of Chinese tariffs on $75 billion of U.S. goods. Hours after the Chinese announcement the U.S. President announced higher tariffs and “ordered” U.S. companies to stop doing business with China.

As tariff talk ramped up, Jay Powell, the Federal Reserve Chairman, calmed markets by saying that the Fed is “carefully watching developments” in the economy and will “act as appropriate.” The Federal Reserve did take action during the quarter with not only one interest rate cut in July, but another rate cut in September on concerns of slowing global growth and the impact of the trade war.

As the U.S. Federal Reserve and other global central banks lowered interest rates, and Europe announced the restart of quantitative easing, gold prices moved higher. Investors are turning to gold as countries continue to debase their currencies through excessive money supply growth.

Even with the Fed becoming more supportive, equity markets had a difficult time moving higher without positive trade war resolution news. When the US announced that U.S. and Chinese trade negotiators would move forward with talks, equity markets began to move higher. However, it was not until the Chinese confirmed that after stalled trade negotiations, a high-level delegation planned to meet for another round of in-person trade discussions in Washington that markets really started to move higher. The S&P 500 jumped to a five-week high, led by Tech shares, after China confirmed that talks were scheduled.

As discussed previously, the yield curve inverted in March with the 3-month Treasury bill yield higher than 10-year Treasury yield for the first time since 2007. That inversion was still in place at the end of the third quarter. This has preceded every recession in the last 60 years with only one false alarm.

Top Performing Stocks

HCP Inc., a real estate investment trust (REIT) that invests in health care real estate, including medical office and senior housing, performed well during the quarter. The stock moved higher as demand for senior housing is expected to finally outstrip supply following years of over-construction in anticipation of the baby boom retirement wave.

Mas Tec Incorporated, an infrastructure and constructions services company, was a top performing stock in the portfolio. The company earnings are anticipated to grow at 34%, beating expectations, which sent the stock higher.

Bottom Performing Stocks

Zillow Group was one of the worst performing stocks in the portfolio. The company had quarterly losses as the new homebuying program is taking longer than expected to reach profitability.

Disney, Inc. was another poor performing stock in the portfolio. The company purchased 20th Century Fox and had difficulty merging the assets which resulted in worse than expected earnings.

Going Forward

The U.S. economic expansion is now officially the longest on record. As discussed in previous updates, the yield curve inverted in March of this year. When the yield curve inverts it typically slows economic growth. Once again, this appears to be true as economic numbers have recently come in weaker when compared to a year ago. It’s difficult to know how much is from the impact of trade war and how much from an inverted yield curve. In either case, economic numbers came in softer in the third quarter. In particular, a key manufacturing number, the Institute for Supply Management’s manufacturing index, showed manufacturing contracted during the third quarter. It was the first contraction since 2009.

To counteract the slowing growth, the Federal Reserve cut rates twice during the third quarter which is a positive for the economy. If the Fed continues lowering rates, the yield curve will likely move back to a normal upward slope which should help increase bank loan activity. Theoretically, this will help keep the expansion going as banks increase the lending of much needed capital to businesses. However, even with banks more willing to provide capital to businesses, corporate capital spending is likely to remain stalled without stability in trade policy.

Investors believe a trade deal will be reached and began pricing it into markets when negotiations were announced in August. With re-election coming up, it is very likely that some type of trade deal will be struck. The trade friction has impacted the economy and the President knows running for a second term will be difficult if economic growth dramatically slows. Even if a trade deal goes through, the question becomes how much damage has already been done. Many companies have already expended resources rerouting supply chains to avoid tariffs. Those resources could otherwise have gone to capital investment. There is a likelihood that markets have over anticipated how much a deal will help the economy. If a deal is reached, markets could falter afterwards.

With the Fed now cutting rates and potential trade war resolution, a continuation of the economic expansion becomes more probable. Nevertheless, the portfolio remains conservatively positioned as we move forward to year end with the knowledge that historically, markets have peaked about a year after an inversion before moving on to prolonged declines.