Hall Capital “Market Views” Newsletter April 2019

This is the 36th edition of Market Views from HALL CAPITAL. Our aim is to provide concise views of where we see risk and opportunity for investors.

Old Age Doesn't Kill Bull Markets
- euphoria does

We are a long way from euphoria for good reason. First some statistics: the US stock market has enjoyed the longest advance in history without a 20% decline (the definition of the end of a bull market.) The rise from the low of March 9, 2009 has eclipsed the previous record bull market length from 1990 to 2000.

Unlike plants and animals, bull markets don't have a predetermined expected life span. However, the longer the time frame the greater the chance of something going wrong, such as a financial crisis or euphoric over-expansion. At the moment we do not see signs of either.

Corporate America has been aided by a significant cut in the rate of corporate taxes while at the same time government spending has increased providing a stimulant to the economy. Cutting taxes and increasing spending is not a sustainable strategy. At some point the rising government debt will need to be paid down. We would expect to see some warning signs as this day of reckoning approaches. None appear at this time.

Meanwhile, slowing global growth, continued trade worries and fully priced stock values give us reason to be less than ebullient notwithstanding our belief that the bull market could still have more innings.

Bonds Have Rallied This Year
- but are still uninteresting

Money market yields are now competitive with 10 year US Treasury yields of just 2.4%. Who would want to tie up their funds for 10 years for 2.4%? Well Germans maybe. Their government bond yields are negative again!

The persistent low inflation and interest rates globally during this long recovery has baffled many economists. I think technology has had a lot to do with it. The influence of technology will not go away. So low inflation may be with us until the government moves to monetize the debt some years in the future.

While inflation is low, there is SOME - almost 2% - and that's a good thing. We don't want to see what deflation feels like. Anyway, the real yield after inflation on longer bonds is distinctly uninteresting. Equity yields are nearly as much but with equities you have a shot a growth. And the 2% or so inflation actually helps with that growth.

So expected returns from bonds are poor, particularly after inflation and stock returns look to be distinctly less that what we have enjoyed over the last 5 and 10 years. What's an investor to do? Stick with equities, keep some SHORT bonds/cash and consider niche alternatives investing in non-publicly traded assets. We are finding niche funds that are turning in double digit returns but have low correlations to the stock market. In other words, they increase the returns and reduce the risks, a nice combination.

Focus List Rebounds
- from difficult Q4

The Focus List rebounded nicely in Q1 but trailed the market due to a negative return from CVS. CVS was bought as a stalwart, a dependable performer. Little did we know when we added CVS to our list that they would acquire Aetna for $70 billion. $70 billion is a big bet for any company and one CVS made to become perhaps the most fully integrated healthcare company in the country. So CVS became an important health insurance provider as well as drug store and Minute Clinic operator -- just in time to hear the "Medicare for all" mantra from more Democratic presidential candidates than just Bernie Sanders. For some Medicare for all means the demise of the private health industry. This has spooked CVS investors, understandably so. While the demise of the US health insurance industry is a possibility, it seems unlikely. We concede that CVS has changed its spots and is no longer a "stalwart", but we continue to hold to see what develops. CVS has the potential to be a big winner as well as healthcare evolves.

The Focus List rebounded strongly, up 8% for Q1. The S&P 500 was stronger still, up 13.7%. Despite this trailing quarter, the Focus List has out distanced the S&P 500 over the long term, up 13% for the the past 5 years vs 11% for the S&P 500. Since inception nine years ago, the Focus List has returned 11.5% vs 10.8% for the S&P 500.

Some of the data below is shown as Not Meaningful (nm) 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

"Trade tariffs are not the answer"
- Tariffs were indeed levied. Negotiations ensued. Our opinion is unchanged.

"It's not that the risk in intermediate term bonds is high, it's just that the return is minimal."
- Intermediate bonds turned in 5% for the last 12 months which isn't too bad. But stocks returned 8%.

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