The Long Dry Road
There is a certain beauty to consolidation. After a torrid stock market throughout 2013, the New Year came upon us bringing a different reflection and the Street realized that much more vigorous economic progress would be needed in order to foster further gains in the stock market.
At work are the two opposing forces of reduced government stimulus, through the Federal Reserve taper (negative), and a slightly improving economy (positive). The result of this standoff is a stock market that goes no where. This is also the result that frustrates the greatest number of players since regular index investors don’t get a boost in the broad market and the hedgies don’t get any volatility in which to make money off their calculated directional bets. This “long dry road” is best described as flattish and it is likey here to stay for the next several quarters.
For investors like us, this long dry road is an oasis. We are relieved by a consolidation like we had in the first quarter because this “long dry road” is so much better than what we have suffered through in other periods that followed bull markets. Minor stock market pullbacks with low volatility are far more comfortable than the widespread selloffs and panic driven volatility that we have experienced in other years. This consolidation, which is the “long dry road”, is friendly. Once this phase is completed, the market can be off to the races again.
The “dry” part of the road stands for the disappointment so many investors stand to have if they are not in the right stocks at the right time. Indices like the S&P 500 or the Nasdaq seem sure to languish this year. How can the market continue to advance in such a smart fashion if economic growth is less than 2%? Never in my career of 30 years has there been a greater divergence between the real economy and the upward trajectory of the stock market that we saw in 2013.
There is a growing rooted expectation that interest rates will rise but long term rates have actually retreated in the first quarter. This is another disappointment to all the hedge funds and quant theorists that build investment models based on large scale economic trends.
Collective stock market indices finished the first quarter unchanged. The performance of various industry groups was marked by notable starts and stops. Whenever it looked like biotechs or technology would start running, they would get spun around in the other direction. When it looked like the consumer sector would start a deep slide, it would turn around and recover. Frankly said, anytime you hear a financial voice wax on about the prospects for an industry group, please stop listening. Analysis about favored industry groups looks to be irrelevant on this “long dry road”.
Neat and Tidy
The appetite in the stock market seems to have been driven by the calendar month. January started off profoundly negative. Six of the first seven days of January were down. The selloff was 6% from peak to trough. In retrospect, this was a no-brainer since so many money managers had big profits on stocks and what better time to take those profits but the beginning of the year. After all of the January selling ran out of steam, stocks ramped up for a fantastic rise in February, totally erasing the year’s losses and even climbing to all time highs in the S&P. February was so good because it reminded us of last year and how rewarding it is to be invested.
March was absolutely horrible. We owned Twitter, Netflix, Facebook, and Tesla amongst others. All of these stocks got crushed. On the other hand, boring stocks like Johnson & Johnson and Microsoft moved to all time highs. I wished we owned those. The most popular sector last year was the biotech sector. This group of stocks got massacred. The Nasdaq Biotechnology Index finished down 13% for the month of March. Investors had previously bid this group to such high levels that the decline in this index meant sizeable losses based on market capitalization.
In the first quarter, we experienced the Sochi Olympic games, an uprising in the Ukraine along with political hedgemony from Russia, a lost Malaysian airliner, and now a new controversial book by Michael Lewis on high frequency trading. All of this, combined with an ever present slow growth world economy, leads us to ask, what does it all mean?
Peregrine Returns and Strategy
Staying consistent with the condition of being on a “long dry road” calls for “sell the rips” and “buy the dips” as a tactical investment strategy. We stand in the “ready position” to be opportunistic and to guide our portfolios to favorable returns by watching for opportunities in individual stocks that come from the frustration of the Street. There were times in the first quarter when our composites led the S&P 500, but the selloff in the final week of the quarter hurt our marks. Our Equity Composite lost 2.65% and our Balanced Composite gained 1.25% for the first quarter.
In our portfolios, we hate being left behind by large capitalized winners. At this time, companies like Caterpillar, Union Pacific, VM Ware, IHS, and Idexx Labs are our favorites. We may choose to trade around these names. Facebook, LinkedIn, Twitter, and Yelp all bear close watching. We will also continue to try and capture any gain that may be in store for Tesla.
Past performance is no guarantee of future results. Investment management involves the possibility of losses. Significant general stock market moves up and down can influence the performance of client portfolios. Composite returns are based on client portfolios of over $100,000. Not all clients are included in the composites. All returns include the reinvestment of dividends. All returns are net of fees. Composite returns are derived from aggregated, time-weighted returns for clients of Peregrine Asset Advisers. Individual client returns can deviate from the composite returns. While Peregrine uses the S&P 500 as a benchmark, Peregrine does not attempt to mimic the structure of this index. Individual client portfolios vary. The number of securities held also varies per client.
Do you have questions or would you like to know more, contact Dan Botti.