Hall Capital “Market Views” Newsletter July 2017

This is the 29th edition of Market Views from HALL CAPITAL. Our aim is to provide concise views of where we see risk and opportunity for investors.

The Advantage of Large Cap Stocks
- vs mid and small caps

In recent years large capitalization stocks have generally outperformed. This is a key reason the S&P 500 has performed so well relative to other benchmarks. The S&P 500 is cap weighted. That is, not only has Amazon, for example, advanced over 300% in the last 5 years, AMZN has 342x the impact in the S&P 500 compared to JC Penny due to Amazon's massive cap weight. In fact, the largest 50 stocks in the S&P 500 explain half the performance of this popular index.

When I say "large cap" I am talking about stocks over $20 billion in market value. These make up about half the S&P 500 index. There are over 7,000 stocks listed in the US but only 258 with values over $20 billion.

As long as relative valuations of large caps do not get stretched, and they are not now, large caps should continue to do relatively well, especially on a risk adjusted basis. Sure Amazon was a small cap in the beginning, but the odds of an average investor finding the next Amazon or Apple out of 7000 stocks are low. Since 1926 25,782 stocks traded in the US. Only 30 have contributed to the market's cumulative wealth as much as Amazon.

Here are the considerable advantages to large caps, especially with respect to risk (remember if you lose 50% on a bad small cap speculation, you have to make 100% on your next winner just to break even):

1. Widely owned. It is unlikely that a handfull of holders dumping their holding will hurt the stock price very much.
2. Global scope and diversification. If the US economy is soft multinationals such as Caterpillar could still see growth in emerging markets.
3. Brand. Big companies tend to have stronger brands.
4. Scale in terms of manufacturing and distribution. And finally,
5. A large and valuable cumulative knowledge base within its human resources, not to mention strong relationships with potential customers. With all of GE's manufacturing know how, if it comes up with a new medical device, that know how will be a strong competitive advantage over a small company with a new invention but without the manufacturing experience or contacts with potential customers.

This is not to say that small caps do not offer opportunity. In fact, the strongest performer in any single period is likely to be a small or mid cap. But the worst performer in a period is also likely to be a small cap. And there are times measured in years when smaller caps generally outperform. However, unless the average individual investor has an unusually intimate understanding of a small speculative stock opportunity, the opportunity is usually not worth the risk.

The Virtues of a Divided Government
- when policy mistakes loom large

Our government is as divided and there are no signs of a coming together. To the contrary, rhetoric is becoming more polarized. While this conflict is disturbing, gridlock can be a blessing if it keeps us from exploding the national debt with unfunded spending programs or provoking a trade war with an ill advised protectionist policy. Despite the distraction in Washington, global growth remains the key factor in the outlook and at the moment global growth continues to edge higher.

Focus List Gains on the Market
- again

The Focus List added to last quarter's strong results by ramping another 11.3% in Q2 on top of 7.1% in Q1 which brings the six months to 19%. The S&P 500 returned 3.1% in Q2 and 9.3% for the six months.

Since inception seven years ago the Focus List has averaged over 17.8% per annum vs 15.4% for the S&P 500.

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 will need to see an improvement in US employment growth and GDP growth before we can see much in the way of robust stock gains over their interest rate driven value."
- Real US GDP growth edged up to 1.2% vs .8% a year ago. But 2 million people have been added to the workforce. Clearly, while not strong growth, this modest growth as contributed to a double digit stock market gain over the last year while the 10 year UST yield moved up to 2.15% from 1.5%.

"Any further changes in interest rates either way will likely increase the volatility of equity prices."
- Interest rates edged up as expected. Though stock prices are up sharply in the last year the path has been relatively smooth without significant volatility.

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