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Growth Equity Portfolio First Quarter Review
It was a rough first quarter for the Broadleaf Growth Equity Portfolio and the markets in general as investors tried to identify market leadership buffeted by AI spending concerns, talk of escalating private credit market risks, and ultimately, the emergence of War in Iran.
Fourth Quarter 2024 Performance Commentary and Review
2024 was about as good as it gets in the equity markets – with the BGEP up 31% and the broader market as a whole posting double digit gains. Underneath the surface, we believe that there are three main drivers of the year’s solid returns. We discuss them below in our market review and outlook.
Little League Trophies
The financial markets have worn many masks this year. Like a ping pong ball, wide and powerful swings from Fed pronouncements, movements in the dollar, and the price of oil have contributed to violent and swift changes in mood. Perception and reality are almost entirely a function of macroeconomic news, but for the very brief period in time each quarter when company specific news arrives in the form of earnings season.
Heading into the Labor Day Weekend
As we head into the extended Labor Day Weekend, we thought it would be a good idea to share some quick thoughts on the continued volatility in the global stock markets, including our own. In addition to our own long weekend, the markets in China will also reopen on Tuesday, after being closed for their holidays the past two days.
A Tale of Two Worlds
We are in a Tale of Two Worlds. One worlds success is highly dependent on the outlook for oil and other commodities, while the others is far less exposed and perhaps even a beneficiary of a more bearish climate. Commodity dependent countries like Russia, Saudi Arabia, China and Australia are hurt by falling oil prices, weak global demand and new sources of supply, while the United States, with a far larger consumer driven economy, experiences an overall net benefit, as perhaps seen in earnings from the likes of Wal-Mart, Best Buy, and Lowes in recent days.
A Moody Market
For those that may not have noticed, stock market volatility has been on the rise in October, with more up and down 1-2% days and powerful intraday moves than we've seen since the Great Recession. Weak overseas economies, fears over what rapid declines in energy prices could mean, and Ebola are just a few of the factors that have been used to explain the disappointing action.
America in the Driver’s Seat – Enjoy the Ride
Like clockwork, earnings season has drawn to a close, creating an information vacuum for the stock market, one in which the media spends more time "making" the news than perhaps reporting it. The marginal dollar at trade - or the price maker in a high frequency dominated trading world - is one more likely to be concerned about the Fed's words over the next two days than the stream of earnings produced by corporate America over the next few quarters.
Our Take on the Fed Minutes
Usually, I don't have anything intelligent to say more than once every month or so and since I'm not a journalist, I'm never forced to make stuff up just to sell papers. I do believe, however, that the release of the Fed Minutes was worth a few of my minutes and perhaps yours. Even if you're yawning right now, please know that putting my thoughts in writing helps me to better manage your investments. As a money manager, we pick your investments, not your money managers. The buck starts and stops with us.
Quick Thoughts
by Doug MacKay of Broadleaf Partners,
We made a final trip to Latvia to complete an adoption, had a graduation party for my high school senior, and attended orientation weekend at The Ohio State University. In between all that, we squeezed in no fewer than sixty baseball games for our three boys. I think I have a daughter too, but Im not entirely sure if she lives with us or her girlfriends. As much as I love summer ball, the season ends this weekend and Im hoping life will settle down to a more sustainable pace and not one reminiscent of a minor leaguer with four kids, a mortgage, and a full time business.
Mixed Signals and the Road Less Traveled
As the markets flirt with all-time highs and a potential shift in Fed policy, earnings season has not altered the fact that the level of investor uncertainty feels elevated. Throw in the case of a really bad winter, a geopolitical environment that rhymes with events just prior to World War I, and poor trading volumes, and it all suggests that heightened levels of unease remain.
In the End, Time is Everything
by Doug MacKay of Broadleaf Partners,
While some will claim that valuations are to blame for the large selloff in growth stocks, high growth stocks almost always have premium valuations. In some sectors of the market, weve found that it makes more financial sense to pay up for a company of the future than to pay down for one in the past. As Warren Buffet has said, "Price is what you pay, but value is what you get."
Cold War: Thoughts on Ukraine Based on a Month Spent in Latvia
by Doug MacKay of Broadleaf Partners,
I have been intensely more interested in the situation developing in Ukraine over the past few months than those that circled Greece, a country of similar size, or Libya and the Arab Spring a few years ago. For the most part, I've taken geopolitical flare-ups in stride in terms of their potential impact to the stock market and the economy. In general, this approach has been the right one.
Broadleaf's 2014 Investment Playbook
Most sell side firms publish their outlook for the economy and stock market at the end of December and in early January. As a buy side firm, we really arent under any expectation to share our outlook for the coming year and, as funny as it might sound, some of our clients dont even care to know what we think, only that we handle what they hired us to do, which is to outperform the market indices over a full market cycle and help them attain their financial goals over time.
Twenty Five
I am not a particularly good salesman. From the time I first meet a prospect to when they become a full-fledged client, it can often take two years even when they initiate the first meeting. Fortunately, growing the firm isnt one of my primary roles, a responsibility that does fall to Bill Hoover, my business partner. The beauty of our relationship is that while Bill devotes his time to our firms outside efforts, I am able to spend almost all of my attention tending to the portfolios of those who have already hired us. (View a printable version of this Economic
Looking Farther Down the Road
The stock market has continued to do very well over the summer months, reaching new, all-time highs and proving to even the most stubborn of skeptics that Great Recessions can become Great Recoveries for those with the appropriate time horizon. While our industry spends a great deal of time and effort focused on relative performance results compared to appropriate benchmarks, the greatest value any financial advisor or money manager can provide is usually addressed far less often; simply keeping you in the game.
Driving with the Doors Off, Part II
About ten months ago, I wrote about my new bulldozer-yellow Jeep Wrangler, comparing the sensation of Driving with the Doors Off to investing in the New Normal, or as I like to call it, a slow growth for as far as the eyes can see environment. While the pavement had always been a mere twelve inches beneath my feet, Driving with The Doors Off made the experience far more real, far more alive, and far more aware of the risks that had always been there. In the New Normal it feels like we are always and everywhere just one small pothole away from the next economic disaster.
Like Baseball in the Snow
As has occurred in each of the last three years, the economy should continue to plug along, not as we might like it to be, but as we can reasonably expect. Growth scare or not, we suspect that the end of 2013 will show that continued progress lies ahead, but perhaps not exactly in the same pattern as it has thus far.
Flying High
The media has made a spectacle out of the Dow Jones Industrial Average reaching new all-time highs. The Dow Jones Industrial Average and the S&P 500 indices do not include the compounding effect of dividends paid by member companies. Any retiree will tell you that dividends represent a return of capital and useful income in the real economy. If you had reinvested those dividends back in the index as they were paid, the old time highs reached in October of 2007 likely would have been passed some time ago.
An Apple's First Worm
Writing about Apple is painful. Not because I have lost money in recent months or have no insight to provide, but because the media will likely report on it ad nausea for the next few days. It is perhaps human nature that the news which is most readily produced is also the news that is most easily consumed. If you want to be read, it's best to write words that people will read. While this makes for great entertainment and advertising, it hasn't typically been the best way to get new investment ideas.
Nothing Changed
Many events have transpired since our mid-September update, but not much has really changed. Economic growth should remain slow for as far as the eyes can see, as each region of the world struggles with its own version of the New Normal. Capitalistic animal spirits have gone the way of the modern American male and while not completely extinct, he's decidedly more metrosexual. Flannel has ceded ground to the skinny jean and ambition has given way to contentment. Save for the halls of America's top military brass, unbridled passion is simply no longer.
All In
Dissatisfied with progress on the jobs front, the Fed went "all in" yesterday in its much anticipated, most recent policy announcement. Unlike QE1, QE2 and Operation Twist, the latest addition to the monetary smorgasbord is open-ended, meaning that it has no pre-established termination date. Policy will remain stimulative for as long as it takes to see a substantial improvement in employment. Rather than keeping rates low well into 2014, it could now be well into 2015 before they tick back up.
Driving with the Doors Off
Two months ago I bought a bulldozer-yellow Jeep Wrangler, replacing my eight year old black Audi A6. While the A6 had been a wonderful car, I was ready for something new and a Jeep fit the bill. Driving with the doors off was a lot of fun, but certainly a different feeling than I was used to experiencing. The stock market over the last two months and perhaps even last three summers has been a lot like that, different, but ultimately rewarding.
Our Take on Todays Payroll Numbers
by Doug MacKay of Broadleaf Partners,
This mornings payroll numbers were disappointing, a fact that is being reflected in the performance of todays stock market, now down nearly 2%. Total non-farm payrolls were expected to show a gain of 150K, but increased only 69K, while the total unemployment rate edged up to 8.2% from 8.1% previously. While still in positive territory, the numbers just werent encouraging in the face of so much global uncertainty coming out of Europe and China. A client sent us a short email exclaiming Yikes and then asked us if the world was coming to an end. This was our unedited response.
Plain Vanilla
In spite of the election year politics and an imposing fiscal cliff, a once in a generation shift is at work in the economy, aligning the stars uniquely in our favor. In its own return to vanilla ways, America is in the early stages of an industrial renaissance, made possible by the advent of cheap natural gas and a corporate sector that has taken its fiscal medicine. Were fitter than anyone on the planet, open to business, and ready to compete. Consumer confidence, in spite of high unemployment, is at record levels, and people are even starting to buy homes again.
Quirky Tales and Waves of Change
While almost all commodities (ag, chemicals, and energy) have tended to move up and down together in price, oil has always beat to a different drummer, likely as a function of the ebb and flow of geopolitical concerns and the physical location of most known reserves. I would guess, however, if natural gas is in such abundance domestically, it could very well be the case around the globe. The prospect for $200 oil might be as remote as NASDAQ 5000.
Waiting for Eighty
A significant shift in investor psychology is underway after many years of prolonged and painful drought. Just as a stronger economy engenders hope about the future, it also has the benefit of smothering the noxious fumes of political division. The biggest risk to the economy right now may be rising gas prices. At the same time when gas prices were at similar levels last year, mortgage rates were higher, consumer confidence was much lower, and employment trends were moving in the wrong direction. Can the United States reassert its leadership in the global economy? We believe it is and it can.
American Creativity
We remain bullish on the stock market. In an environment of low or non-existent bond yields, stocks may not only represent a compelling alternative source of income, but likely have a far better risk reward profile when it comes to upside return potential. After more than a decade of being the cellar dweller of annual asset class returns, domestic common stocks may finally be due for some positive mean reversion. This doesnt mean were headed back to an era of multi-year, double digit returns but, that given a choice among alternatives, stocks should prove to be the best game in town.
Concussed, The Year in Review
We remain biased to a slow growth environment for as far as the eyes can see, an environment which continues to favor innovators. At the same time, with concerns about a slowdown in China emerging and Europe likely already in recession, the Economic Cycle may deserve some increased attention as a driver of alpha in the portfolio, particularly with a global monetary policy bias towards easing and leading economic indicators in the United State now improving.
Gump Pong
The behavior of the stock market of late has been a lot like Forrest Gump practicing ping pong-blazingly fast and completely mesmerizing. After zoning out, I had to ask myself, did that really happen? I've experienced many ups and downs in the stock market over the last twenty-five years, but rarely have I ever seen so many high speed, directional changes compressed into such a narrow period of time. By my count, the S&P 500 experienced four round trip volleys of ten percent or more since early August, before moving to higher ground in late October-all on lighter than normal volumes.
Bumped by the U.S. Downgrade
In an environment where the economic cycle will likely remain subdued for the foreseeable future and the credit cycle is virtually nonexistent, where are investors likely to find the greatest investment values? Barring an outright recession, the greatest wealth creation will likely accrue to those companies most focused on our third driver of stockholder value, the innovation cycle. When growth is scarce and credit is in short supply, those companies that can still grow in spite of these constraints become scarcer still, and the premiums they are afforded should climb.
Yellow Jerseys
As an investor, it is important to realize that while you can win the occasional stage race by going it on your own and betting big on a single stock or perhaps along the outcome of a singular event like the debt ceiling, more often than not, the market like the peloton will usually catch and pass you by, leaving you in the dust. Like the peloton, evidence suggests that few investment managers outperform the market year in and year out, but over time, those that understand the race they are in significantly increase their odds of emerging victorious.
Broken Records
by Doug MacKay of Broadleaf Partners,
Since February, the markets have been hitting new recovery highs, succumbing to market pressure, then reversing course and moving on to higher highs. The pattern is beginning to feel a lot like a broken record.Currently, we've been experiencing a renewed downtrend, with the market off 6% from its April highs. While these moves are normal following a 30% plus advance in just eight months The truth, however, is the uninterrupted steady gains we experienced from August through late February may be far more unusual for the markets than the back and forth gyrations of the past three months.
Silver and Gold, Silver and Gold
Silver and gold may still look good as decoration but the metals have also lost some luster in the dental profession (gold vs. porcelain crowns) and for anyone who uses a digital camera instead of old guard film. (Silver is used in film processing.) As most know, silver shot to new highs last week amidst a frenzy for precious metals and perhaps, their perceived inflation hedging capacities. This week, the story was a bit different, with the metal experiencing one of the most stunning drops since the Hunt Brothers tried to corner the silver market back in the early 1980?s.
Forgetful
The S&P 500 fell by roughly 16% from April to July last summer, and then moved sideways until people started to discount the prospects of the Fed engaging in QE2. As the markets picked back up following the recognition that the Fed would stay easy given high unemployment and very little inflation and the elections afforded a more balanced political agenda, leading economic indicators began to follow suit, the economy firmed once again, and the stock market finished up 15% for the year. Today, the situation, while different, nevertheless rhymes.
Let Yourself Feel Good Again
by Doug MacKay of Broadleaf Partners,
The stock market has continued to perform exceedingly well so far in 2011 and is now up roughly 7% year to date. While an oil spill or European contagion type event could always disrupt the progression, the stock market, S&P 500 profit levels, and leading economic indicators are all pointing to a similar conclusion. The economy is likely to graduate from its recovery phase to an outright expansion sometime this year. It's time to start letting yourself feel good again.
Market Review & Outlook
by Doug MacKay of Broadleaf Partners,
In 2011, we remain optimistic, believing the economy will progress from its recovery phase into expansion territory sometime during 2012. A more favorable regulatory and political environment should be a positive for corporate America, which may finally begin to spend its huge accumulated cash hoards, not solely by returning it to shareholders in the form of stock buybacks and dividends, but by also hiring new employees and upgrading their capital equipment as demand trends improve. A continued trend of bond market outflows and equity inflows should also prove constructive for the stocks.
The Year in Review
by Doug MacKay of Broadleaf Partners,
For 2011, we believe this trend of bond outflows and equity inflows will likely continue, overwhelming any concerns about valuations or fundamentals.In the short run, I've come to realize that fund flows, or investor desires for specific favored asset classes over others - tends to exacerbate price movements in both directions, often for much longer than most expect.I see great things for the stock market in 2011. While an improving economy will help, a shakeout in bonds may be just what the doctor ordered to get investors truly interested in stocks again.
Results 1–50
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