Our weighted average return in February was -3.18%. Since 2015, we have generated a net return of +35.68% with a Sharpe ratio of 1.24.
In terms of investment strategy performance, our weighted average net returns for February were (a) -0.36% for conservative strategies, (b) -3.25% for balanced strategies, and (c)-4.37% for aggressive strategies.
February was a difficult month. January’s euphoria gave way to massive selling across all asset classes and served as a reminder that investing in capital markets is not easy.
Selloffs like the one that we witnessed in February trigger fear and doubt in investors. There is no way of being completely certain how much asset prices may fall on a short-term basis or how quickly they will recover. Although we invest client assets based on what we believe will transpire in the long-term, we are always aware of the psychological strain that such sell-offs can induce.
In our January commentary, we wrote:
Unfortunately, since the start of February we have witnessed a brutal sell-off that has reclaimed many of our January gains. We see this sell-off as temporary and do not see reason to panic. Our theses remain intact and we will be looking to add to discounted positions.
Thus far, our reaction has been correct. Although we are not always able to convince all of our clients to weather the storm, we try to take advantage of price weakness to set up future profits for others.
The primary instigator for February’s sell-off was higher inflation, which was signaled by a better than expected average hourly earnings data on February 2nd. If you have been reading our monthly reports, you will know that we have been keenly aware of inflationary forces and have shifted our investment strategy to accommodate the impact of inflation on our portfolios – namely by overweighting commodity producers. Unfortunately, commodities and commodity stocks were caught in the downdraft as well last month, but our thesis remains intact.
In February, Jerome Powell replaced Janet Yellen as Chair of the US Federal Reserve. We do not foresee that his policy will differ significantly from Yellen’s and anticipate that rates will continue to rise at a gradual pace. Unlike his predecessors for the past forty years, Powell has a background in investment banking and is not an economist.
We would be remiss not to mention that Trump’s corporate tax cut has elevated the issue of twin deficits (fiscal and trade) in the US. We find this to be the most appropriate explanation for the recent weakness of the US dollar. However, we believe this rationale to be overdone. Capital flows to where it is treated best, and Trump’s corporate tax cut has been the strongest encouragement to date for enterprise to flourish in America. That being said, Trump’s decision to implement tariffs on imported steel and aluminum sent tremors through financial markets at the start of March and led to the resignation of Gary Cohn from his post as Director of the White House’s National Economic Council. Tariff wars are terrible economic policy, but it has since become clear that the tariffs will not be imposed on all trading partners. It is rumored that Larry Kudlow will replace Cohn. Kudlow is an outspoken supporter of a strong dollar policy.
On behalf of our Client Portfolio Management team, I thank you for your continued trust and support!
FULL DISCLOSURE: Please note that the opinions expressed in this blog should in no way be considered as investment advice or a solicitation to buy or sell securities.