Quotidian Investments Monthly Commentary – March 2015
Markets remain volatile; already in this first quarter the S&P 500 Index has risen or fallen over 1 percent intraday on 17 occasions. By contrast, during 2014 the stock market moved 1 percent or more on only 10 days per quarter.
Every good report on the economy is met by speculation of an imminent move by the Federal Reserve to increase interest rates in the United States. Any hint of a rate increase sends shudders through the markets and propels equities downwards.
Adding fuel to this speculation, the latest US employment report was released on 7th March and was another humdinger. The American economy created 295,000 jobs in February, a figure far above the average prediction for a rise of 235,000. That February number was also up sharply from 239,000 in January.
The unemployment rate sank to 5.5 percent from 5.7 percent and is now at its lowest level since May 2008.
In the immediate aftermath of the release, US gilt yields spiked higher across the board. Conversely, equities were marked quite substantially down on widespread concerns that the Federal Reserve would be prompted to increase interest rates sooner rather than later.
There is no shortage of tricky cross currents for investment managers to navigate at the moment. In our view the best strategy in this situation is to review the portfolio and ensure that we stick with highly-rated stocks in economically beneficial sectors whilst avoiding those vulnerable to interest rate shocks.
The other main influence this month was the latest Federal Reserve meeting on 19th March. The Fed’s dilemma at that meeting was that it has clearly been hitting the target on the growth side of its mandate but it has equally clearly been missing the goal on the inflation side of its mandate. The problem it therefore has to resolve is when to raise interest rates. That situation is further complicated by the recent strength of the dollar which now threatens to dampen additional progress in the US economy. An untimely increase in US interest rates would promote even greater unwanted strength in their currency.
US economic growth is still noteworthy and their job market is in good shape although housing remains in the doldrums. The Fed also dropped its pledge to be “patient” about raising interest rates, a move that opens the door to a rate increase in the foreseeable future.
But the most important thing is that the Fed made a number of veiled hints in relation to the dollar and the side effects of its recent remarkable strength. Specifically, their statement noted that “export growth has weakened”; that “inflation has declined further below the Committee’s longer-run objective” and that the “Committee continues to monitor inflation developments closely.”
In her post-meeting press conference Fed Chairman Janet Yellen commented further on the dollar. She said “we are taking into account international developments” in currencies, and cited the “depressing influence” of the dollar’s rise on inflation as well as exports.
No doubt this is the Fed’s attempt to prepare the market for returning to historically more normal interest rates (because of improved economic and job growth) but simultaneously talk the dollar down (to prevent imported deflation).
Our view currently is that US interest rates are unlikely to increase before June at the earliest and, although it is not a fashionable opinion, that rates may stay on hold for some time beyond that for fear of causing a decline in corporate profits. If we are proved to be wrong then we will, of course, change our opinion.
On 20th March the FTSE reached its highest ever level of 7024 before settling back marginally to close at 7022. Its previous all-time record closing point of 6930.20 was achieved on the last working day of 1999 and it is a salutary fact that it has taken so long to re-attain and exceed this peak. The challenge now will be to sustain this 7000 level, although by the end of March the FTSE had slipped back to a reading of 6773.
Economic indicators, led by the USA, continue to suggest that a viable recovery is under way. However, the global glut of cheap money and its resulting consequence of creating an ever strengthening US dollar is beginning to have a negative effect on American corporate earnings and profitability. If this dollar strength is allowed to continue unchecked then it will result in falling equity valuations. We remain vigilant.
At 31th March the FTSE 100 closed at +3.15% for 2015 to date. By comparison the Quotidian Fund finished March at +13.63% for the same period.
It is fair to say that Quotidian’s performance over the past three years has been excellent and in the first quarter of 2015 it has been exceptional. Of course, it is the intrinsic nature of stockmarkets to see a period of correction after such a prolonged bullish phase and it is therefore unlikely that our pace of growth since 1st January will be sustained throughout the year. We do, though, have a sizeable cushion against the effect of any potential market adjustment.
Having said that, our mandate is global and our strategy is to try to be in the right market sectors and the right companies in those sectors at the right time. Our analysis therefore focusses on finding companies that have:
a long enough history for us to opine with confidence on their financial stability
a long history of share-price reliability and relatively low volatility
a strong focus on research and development in their specialist areasWe will maintain that approach and our vigilance as we seek to navigate the rest of the year.