Fourth Quarter 2018 Client Letter

“I figured it out.  I figured it out.  With a pencil and pad, I figured it out.”  These first three lines belong to the song Seven and a Half Cents from the 1950’s era musical The Pajama Game. The Richard Adler and Jerry Ross lyrics have served as one of my favorite quotations for many, many years.  You see, my grandfather, father and several uncles all were manufacturers of popular-priced pajamas.  And I would bet that many of you might have worn them as children, given that all the major department stores of the era sold their pajamas.   Now you may be asking why I started off with these lyrics.  Well, let me explain.  As an investment advisory we have always married fundamental research with technical analysis.  For many years this approach has served our clients well.  So, with a pencil and a pad…and now a computer, we figured it out.  But in the past few years the market has changed.  It’s not so easy to figure it out any longer.   The lead story in The Wall Street Journal on December 26, 2018, hit it on the head, as to why this is a very difficult market in which to gain an edge.   The story stated that, “Behind the broad, swift market slump of 2018 is a key figure:  85% of all trading is on autopilot – controlled by machines, models or passive investing formulas to create a trading herd that moves in unison and blazingly fast.”  The article went on to explain that, “Today, quantitative hedge funds, or those that rely on computer models rather than research and intuition, account for 28.7% of trading in the stock market.”  That’s quite a lot to digest, so I will recap. The year 2018 was a painful experience.  The only thing good about it is that it is done.  Over.  Finished.    Driven by factors such as China tariffs, a Fed that increased short rates four times, uncertainty around how many additional hikes would occur during 2019, and a hamstrung Congress, market volatility exploded as the year concluded.    The U.S. equity markets experienced their first negative year since 2008, and the only positive was that this performance was better than what the international markets gave investors.    Now, before you throw up your hands in disgust, let’s review some of the positive factors for 2019 that can renew your faith in the market.  Unemployment is at historic lows, and corporate earnings are still growing, although the pace is less than in previous quarters.  We believe that trade tariff negotiations will prove beneficial for investors, and we look forward to a profitable investment environment in 2019.