Hall Capital “Market Views” Newsletter January 2016

This is the 23rd edition of Market Views from HALL CAPITAL. Our aim is to provide concise views of where we see risk and opportunity for investors.

The Fed Finally Hikes Interest Rates
- and we enter a new phase

The quarter point move in December was the most telegraphed rate hike in history. Fed policy is unlikely to be an uncertainty going forward. With inflation below 2%, the Fed is clearly on a dovish path and we are only likely to see a maximum of two hikes in 2016, if any, as the inflation and growth outlook is subdued.

Demand driven growth is sluggish world wide. Consumers everywhere are either paying down debt, saving for a rainy day or simply can't afford to buy more goods and services.

This is partly due to moribund population growth in Europe and Japan, poor economic policies in several important emerging markets such as Brazil and Argentina, and a cyclical slowing in the second largest economy in the world: China.

Some conditions will improve in due course, if not population growth in Europe and Japan. China's build out is largely over and it is necessarily moving to a more consumer based economy. While demand for cement will continue to slide, demand for iPhones will increase. Voters in Latin America are showing they are fed up with corrupt and inept leaders and change is in the wind there.

So except for slowing population, demand will re-emerge eventually. And when it does global GDP growth will bend up.

Geopolitical Risk Abound
- but fundamentals in the US are more important

On the geopolitical front, we have China acting out in the South China Sea, Putin being belligerent as usual with support from 80% of his citizens, a Saudi Arabia on the verge of revolution, not to mention the usual chaos in the Middle East. And mark these words, some terrorist group will likely strike the US or one of our allies in 2016.

While any of the items could cause the market to sell off, any decline would be limited if we began to see meaningful wage growth in the US. IF job growth trends continue and the unemployment rate in the US drops below 5%, the ensuing labor market tightening should provide some welcomed wage growth. This would be a favorable development for the stock market.

Since 1975 there have been six years (not counting 2015) in which the S&P 500 price change was roughly flat (plus or minus 3%). Following each of those years the S&P 500 enjoyed a double digit advance.

While this numerology offers some comfort, given the issues cited we would venture that the odds of a positive return year as average but the chances of a double digit advance are LESS probable than usual. Furthermore, the odds of a negative return year in 2016 are no lower than usual, which is 20%.

The times suggests some dry powder, sure, but not running completely for cover.

Focus List Performs
- better relatively than absolutely

Led by a rebound in Chevron and strong performances by new additions Sanderson Farms and Corning, the Focus List bounced 4.8% in Q4 which lifted the 2015 return to 2.5%. This compares favorably to 1.4% for the S&P 500. And the S&P 500 was particularly hard to beat last year. Fully 18 out of the 21 general equity mutual fund categories tracked by Lipper turned in NEGATIVE returns last year.

The Focus list has advanced 124% since inception, well ahead of the S&P 500. And most of this time, the index was a challenge to beat.

Though we almost never take a short term gain, we are removing Chevron from the Focus List. Chevron, with its bullet proof balance sheet, will likely perform better than most oil companies during tough times, but the stock has rallied 17% in one quarter even though the problems in the oil patch have not improved a whit. We are replacing Chevron with AmTrust, a high quality medium size insurance company.

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 believe we are in the downswing of a commodity "super cycle" which will bottom this year, but not fully recover for many years. This bodes well for the inflation outlook."
- Clearly the "this year" part was off, but we stand by the rest.

"With the US economy steadily strengthening, no inflation threat, and low return alternatives, large cap US equities remain the long term asset of choice."
- Large cap US equities was indeed the best performing pretty major asset class, though showing only a modest return.

"Among emerging markets only China looks interesting"
- As the Chinese proverb goes: "May you live in interesting times." Chinese stocks generally ended the year down just - 3%, though it was a rough roller coaster ride. This compares to -14% for a major emerging market index which would have performed much worse were it not for China.

"Last year, we cited 'clear sailing'. This is no longer the case with rising interest rates on the horizon."
- Indeed 2015 was not clear sailing. Choppy waters but no rising tide. Admittedly the prospect of the modest rate hike we had may not have been the only headwind.

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

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