Hall Capital “Market Views” Newsletter October 2017
This is the 30th edition of Market Views from HALL CAPITAL. Our aim is to provide concise views of where we see risk and opportunity for investors.
Record Low Volatility
- unlikely to persist
The weather may be becoming more violent, but stock prices are calmer and calmer. It is surprising and puzzling. One possible explanation is the demise of many proprietary brokerage house trading desks which traded to and fro. The volume of trading IS lower.
Low volatility has a way of increasing investor complacency. When returns are steady, investors feel more comfortable and are more likely to hold onto or even add to their positions. While I have said the US economy is a slow moving tanker, signs of a change in direction in the economy can have an out-sized impact on stock prices. It is hard to say whether the current complacency will be met by higher than normal volatility once we have an inevitable change of direction in the economy. The global economy is moving in the right direction currently. There are no conditions present which portend a recession. Thus, we remain tilted toward equities but with some hedges. In due course volatility will return. It takes a recession to take the market down 25% to 35%. But a 5% to 10% correction could come at any time for no particular reason other than upsetting complacency.
The End of Work
- is not the end of the world
In 1995, in a book entitled The End of Work, Jeremy Rifkin argued that worldwide unemployment would increase as information technology eliminated tens of millions of jobs in the manufacturing, agricultural and service sectors. He predicted devastating impact of automation on blue-collar, retail and wholesale employees.
While elite corporate managers and knowledge workers would reap the benefits of the high-tech world economy, the American middle class would continue to shrink and the work place would become ever more stressful. In the last couple of years this concept has received a lot of attention. Some of Rifkin's expectations have been fulfilled, especially with respect to the shrinking middle class.
Others have taken the thesis a step further and have suggested that AI will destroy jobs across knowledge workers as well. Unemployment will become chronic and we will indeed experience the "end of work." This second derivative of the thesis is highly unlikely. There will always be plenty of work, but the pay differentials will be high. The trend toward the elites enjoying a disproportionate amount of the wealth will only increase in a world with more robots and artificial intelligence. Dealing with those underemployed or otherwise "left behind" will continue to be a challenge for our political system.
Looking at the investment implications, rather than just political or social, wealth is likely to accumulate disproportionately to elite corporations in the future just as it has to elite workers in recent history. Strongly competitive large global companies are more likely to be able to reap the benefits of advanced robotics and artificial intelligence. Amazon and Alphabet (parent of Google) are good examples of elite companies pushing the envelope in robotics and AI. Regretfully, I have never owned Amazon. It always seemed too expense. Alphabet, on the other hand, though hardly depressed, sports a more reasonable valuation. Alphabet's dominate position and considerable human capital give it a greater chance to take advantage of advancing technology rather than falling victim to it.
Focus List Advances 23% This Year
- outperforming the market again
The Focus List returned 5.0% in the last quarter which boosts the nine month return to 23%, well ahead of a strong S&P 500 which was up 4.5% and 14.3% for the same periods.
Since inception over seven years ago the Focus List has averaged a compounded annual return of 17.6% vs 15.5% for the S&P 500, even though the past several years was a time when the S&P 500 was a hard index to beat.
The absolute performance looking forward over the next seven years will no doubt be less than what we have enjoyed over the last.
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 have two highly imperfect candidates running for POTUS. The stock and bond markets face complex challenges but if we were to isolate the impact of this year's outcome, a Trump win will likely be un-welcomed by investors."
- While futures sold off sharply on the news of the surprising win, the market closed higher the day after the election and has moved steadily higher since, as have many markets around the world, including Mexico and China.
"The good news is if Trump were elected, he would probably not even try to pursue all these policies. And even if he did, Congress would not approve, or at least not most of them. (If Mexico actually agreed to build a wall -- fat chance -- Congress might let them.)"
- So far this year no major legislation has passed Congress.
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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