In December, climate change was in full force on Wall Street.  We had an impending trade war, a collapsing stock market, a scary inverting yield curve, a government shutdown, tumbling retail and online sales, rising oil prices, a collapse in job growth, Brexit chaos and negative interest rates in Europe as well as growing fears of recession worldwide.   Overlay that with all the global political and military jockeying, and it was noticeably chilly during the fourth quarter. The result was many indices posted their worst results since 2009.

Fast forward to April, the weather has improved.  The biggest single factor was likely the Federal Reserve recanting its plan to raise short rates, and now is seen as more likely to cut rates, with the end of the government shutdown perhaps a close second.  The market has also become comfortable that a trade war will be averted, that an inverted yield curve may not happen – or matter, that corporate earnings are growing beyond just the favorable tax impact, GDP estimates for the second half are moving higher, job growth snapped back (which may have been related to data issues during the shutdown), Brexit chaos has been postponed, and the fear that worldwide recession is imminent has subsided for now.  Just another quarter in the markets in other words.

Our equity strategies earned a solid return in the quarter.  Our Small-Cap Value Focus strategy posted a net return of 13.07% in the first quarter, beating the 11.93% return of the Russell 2000 Value benchmark.  Our Small-Cap Value Diversified strategy, which recently was noted for a top five performance ranking for the trailing three-year period ended 12/2018 by PSN/Informa (See www.spequityadvisors.com/press/ for more details.), had a 11.54% net return in the quarter, slightly behind the benchmark.  Our concentrated strategy benefitted in the quarter from a sector tilting toward U.S. industrial companies that do better in a growing economy, particularly one in which core manufacturing costs such as energy, labor and transportation are increasingly advantaged due to lower U.S. energy costs relative to the rest of the world and finally labor cost parity to China.  We talk about some of our themes and our highest and lowest performers later in this commentary.

Because we invest for the long term, we try hard to remember that short-term market changes are largely emotional reactions to short-term news.  We focus our attention on our long-term thesis and our long-term financial projection for each company we own, which leads to our estimate of the underlying intrinsic value of the business, and our expected return, should we invest, which is always based on the current price.  If the news leads to a projection change, our expected return changes and we reassess.  If the thesis changes, we tend to exit the position.  More often than not, daily news and market swings lead to expected return changes that we can take advantage of when seeking long-term excess returns.  This approach worked well during the past few months, and we look forward to continuing our efforts to drive returns for our clients.

Thank you for your interest in Sterling Partners Equity Advisors.

Kevin E. Silverman, CFA
Chief Investment Officer
P: 312-465-7096
C: 312-953-0992
ksilverman@sterlingpartnersequityadvisors.com

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