Hall Capital “Market Views” Newsletter July 2018

This is the 33rd edition of Market Views from HALL CAPITAL. Our aim is to provide concise views of where we see risk and opportunity for investors.

People Believe What They Want to Believe
- at their peril

A famous evangelist recently acquired his fourth private jet because, "God told me to." Candidate Trump offered to "make America great again"and voters believed. Trump has faith in a scenario whereby America takes back manufacturing from our low cost trading partners, resurrecting the "good 'ole days" of workers clocking into factories, mills and coal mines. Trump believes we will achieve this by pulling out of trade agreements and imposing tariffs on imports. He desires this scenario so much that he has purged his advisers of non-believers. What happens to coal is not important. Trade, however, is vital to the world's economy.

So far the "noise" on tariffs is greater than actual trade policy changes, not to mention the impact on the economy. It appears that investors have become inured to protectionist rants and are awaiting more meaningful signals before running for cover. To be sure, contrary to Trump's assertion, no one wins a trade war. But it remains to be seen if trade tensions escalate beyond skirmishes to an outright war which would likely include tariffs on autos.

So the trade saga will continue and the noise (not to mention rising interest rates) will limit stock market advances, all other factors equal. Whereas, if tariffs escalate impacting some $400 billion of imports on the basis of a false premise, stock prices will suffer. It would be good for politicians and investors alike to consider Mark Twain's warning: "It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so."

Midterm Elections Likely to Move Politics to the Background for Investors
- thankfully

The macro picture over the last 18 months has been colored much by speculation on policy initiatives - tax cuts, trade tariffs etc. The House will likely flip to Democrat control come November. This will mean gridlock until 2021. Other than a potential bi-partisan infrastructure bill, investors will likely not be as pre-occupied with policy initiatives any more and can turn to focusing on the usual drivers of security prices, namely growth and inflation. To the extent the usual drivers are positive, the reduction in political uncertainty that gridlock brings should be positive for p/e multiples.

Remember, stock market bull markets do not die of old age but of exhaustion due to over heating, a crisis of confidence, or a self inflicted policy mistake.

Focus List Edges Higher
- rebounding a bit from Q1

The Focus List returned 2.6% in Q2, in line with the S&P 500's return of 2.7%. We buy "stalwarts" mostly due to their dependable growth. On occasion we will add a "fallen angel" like we did with Genesco. CVS is unusual in that it is a stalwart that has also become a fallen angel. (Sometimes called a mistake.) As mentioned before, much is riding on the outcome of CVS's $70 billion acquisition of Aetna.

Driven mainly by stalwarts, since inception over eight years ago, the Focus List has averaged a compounded annual return of 16.2% vs 15.2% 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

"... large caps should continue to do relatively well, especially on a risk adjusted basis."
- Large caps as measured by the S&P 500 returned 15% in the last 12 months, trailing the Russell 2000 small cap index which returned 18.5%, with all of the Russell out-performance coming in the recent two quarters.

"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."
- Congress passed a $1.5 trillion tax cut without offsetting spending cuts. The Trump administration has pursued trade tariffs unilaterally under the premise of national security.

"Despite the distraction in Washington, global growth remains the key factor in the outlook and at the moment global growth continues to edge higher."
- Global growth continued and the US stock market advanced 15%.

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