Hall Capital “Market Views” Newsletter April 2017

This is the 28th edition of Market Views from HALL CAPITAL. Our aim is to provide concise views of where we see risk and opportunity for investors.

Market Moves Higher Despite Trump
- not because of Trump

Arguably the strength of US stock market this year has less to do with who is running our government than the fact that the world wide economy is warming up, if slightly. Many important markets outperformed the US in the first quarter including Germany, Spain, Brazil, India, China and Mexico. Yes, China and Mexico, which were singled out by Trump to lose in his proposed trade policy, saw their stock markets ramp more than twice as much as the US market in Q1.

US equity investors are choosing to focus on the good part of the "business friendly" Republican dominated US government and discount rhetoric on protectionist trade policies as unrealistic.

The US economy is like a very large ocean tanker moving slowly forward with a certain momentum. It is very hard for rhetoric to influence the path of the economy, at least in the short term. Loud pronouncements from the bridge do not speed up, nor, fortunately, slow down the tanker.

Policy itself may have more impact but so far, despite promises of immediate action, there have been no major policies implemented. Nay, we don't even have a budget. One high priority was tax reform. The odds of meaningful tax reform this year have fallen from 80% to 50%. The good news associated with governmental gridlock is that we are also less likely to see a detrimental trade bill.

If the large global economies begin to pull ahead in unison, we could see a second wind to the economic expansion and more upside to stock prices. Though Washington can be a major distraction, it is important for investors to keep an eye on the fundamentals and not blame our leaders in Washington, nor give them credit, for developments outside their control.

High Stock Prices Seldom Trigger Bear Markets
- but they always limit expected returns

Global growth bending up and moderate inflation make for a favorable background for investors. However, much is reflected in stock and bond prices. Our long term, 5 to 10 years, expected returns for a balanced portfolio of both stocks and bonds portfolio has been 6%. From current price levels, the long term expected average return is 6% at best.

Over the next quarter, we could see higher interest rates and a shift from positive seasonality to neutral to negative for the stock market. While making short term predictions is folly, let's just say with the highly polarized political environment and high stock prices, the chance of something sparking a market pull back larger than we have seen in the past two quarters as we approach mid year is high. Longer term, the slope of the undulation of the stock and bond markets will depend on the speed of the tanker.

Focus List Gains on the Market
- without taking more risk

The Focus List added to last year's strong results by ramping another 7.1% in Q1. This compares to 6.1% for the S&P 500. Since inception 6.75 years ago, the Focus List has returned 16.6% per annum, vs 15.5% for the S&P 500. The FL return advantage over this time frame is extraordinary. as the capitalization weighted S&P 500 index substantially outperformed the average stock. This explains why the index has outperformed some 80% of equity mutual funds.

I might add that virtually all the gains taken in the FL have been long term. Walmart and CVS have been held since inception. Thus, this strategy has also been tax efficient.

(Note that last quarter the average return for the S&P 500 was understated. There are slightly different ways to calculate the return depending on dividend reinvestment assumptions. In the future we have settled on using a third party calculation of the S&P 500 Index on a consistent basis.)

For individual stocks as well as selection strategies, past performance is not necessarily indicative of the future.

Hall Capital Focus List

Follow Up – from our letter one year ago

"We have concerns, but oil prices are not one. If you can determine that the market psychology is focused on one variable (wrongly) then that is usually an opportunity to take a position in the other direction."
- The S&P 500 has bounced back over 14% since this oil price induced swoon.

"We expect global slow growth to continue. This is not a bad environment for stocks..."
- The Q1 2016 oil price collapse was not a precursor to a recession after-all. Global growth continued its slow progress and equity markets posted mostly double digit gains.

"Municipal bonds have value but plain vanilla quality taxable bonds, though not risky, simply don't offer an interesting return opportunity..."
- The Barclay's Aggregate Gov't/Corp Bond index earned about 1% in the last year.

NOTE: Now in addition to ALL our quarterly letters, on our website is a tab with just the Follow Ups.

About HALL CAPITAL

HALL CAPITAL, LLC is a registered investment advisor and was formed by Principals from Arcturus Capital in 2010.
For more information, contact Donald Hall 626 578 5700 x101 dhall@hallcapitalmanagement.com

HALL CAPITAL | 199 S. Los Robles Ave | Suite 535 | Pasadena | CA | 91101