Hall Capital “Market Views” Newsletter April 2018

This is the 32nd edition of Market Views from HALL CAPITAL. Our aim is to provide concise views of where we see risk and opportunity for investors.

Trade Tariffs are Not the Answer
- and are a low return/high risk strategy

Increased trade increases global wealth, if uneven wealth. Decreased trade just decreases wealth.

Trade tariffs may increase job security for a few workers, but the tariff tax is borne by everyone else. And that's the upside scenario. The downside is a major trade war that could destroy jobs across many industries, and even trigger a recession. No one really wins in a trade war.

We are not currently in a trade war. So far we have seen mainly escalating announcements. It will be months before most of the meaningful tariffs will be levied, if at all. Negotiations may preclude a trade war.

So while this administration's trade ideology creates the risk escalation, a major war is hardly a foregone conclusion. As long as there are announcements that could provoke more protectionism by our trading partners, however, investors will continue to worry about the downside and equity markets are likely to be volatile.

Bonds Have Enjoyed a 35 Year Bull Market
- and it is over

Our outlook has been cautious on bonds for some time. It's not that the risk in intermediate term bonds is high. It's just the return is minimal. We believe there are better return/risk vehicles than bonds for most investors.

Many investors who bought bonds many years ago have enjoyed, in addition to interest, some price appreciation due to the decline in long interest rates from 15% on the 10 year UST in 1981 to 1.4% in July 2016. The 10 year UST yields have backed up somewhat to 2.8% today. The long term average yield on the 10 year is 6%. Bond yields are likely to not move quickly in either direction, but through fits and starts work their way somewhat higher.

This does not mean that bonds do not have a role in a portfolio. That role depends on the need to hedge against recession risk and your personal risk tolerance. Though we prefer to hold mostly equities and alternatives, the bonds we would generally recommend would be intermediate term maturities. For taxable portfolios tax exempt municipal bond yields are rather high in relation to taxable bonds.

Focus List Corrects
- after being up 33% last year

The Focus List sagged -8% in Q1 giving up almost all of its 8.8% gain in the previous quarter. This compares to -.8% return for the S&P 500 in Q1. CVS was a drag on the portfolio following the $70 billion offer to acquire Aetna. This very large acquisition has indeed increased uncertainty. However, CVS's opportunity to make more out of its Minute Clinics under more vertical integration offers an interesting upside.

Since inception eight years ago the Focus List has averaged a compounded annual return of 16.3% vs 15.3% for the S&P 500.

Some of the data below is shown as Not Meaningful due to the one time distortions due to the new tax law.

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

"The odds of meaningful tax reform this year have fallen from 80% to 50%"
- "Meaningful" and "reform" can be debated. But there was indeed a $1.5 T tax cut enacted in December of 2017.

"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."
- The major global economies did indeed bend up in unison for the first time in a decade and global stock prices worked their way higher.

"...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."
- It wasn't until Q1 2018 that the US stock market corrected 10%.

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