Dear Clients and Friends,
The year 2017 provided us with all-time record highs for the stock market. The Standard & Poor’s 500 Index closed at 2,673.61, up 19.08% for the year. Down days have been scarcer than usual during 2017 and down weeks and months were even scarcer. The enclosed chart, provided by Charles Schwab, depicts every monthly change since 1988 in the broadest global stock barometer, the MSCI All Country World Index (ACWI). The chart depicts what the global stock market did during all 360 months from 1988 through December, 2017. Green indicates an up month, red indicates a down month. In every year since 1988, even the most powerful years of the 1990’s stock market boom, the ACWI registered at least three down months. There were no down months during 2017. Even though December is not shaded and as you can see, the year 2017 was the only year that produced twelve consecutive months without interruption.
Emotions were running high on Wall Street after President Trump and GOP leaders celebrated passage of the Tax cut and Jobs Act. TV pundits, together with “experts” all over Cyberspace, are urging investors to jump into stocks of companies set to benefit from the new 21% corporate tax rate. However, while it is undoubtedly true that lower taxes will bolster the bottom lines of many public traded businesses, everything has its price. If someone overpays for a company’s earnings, they can still lose money on the stock, even if the company reports higher profits in 2018 due to the new tax law. The key is to figure out whether the current price of the shares already reflects the projected earnings bump from the lower tax rate. In many cases, that is not easy to determine. However, proper research as well as price trends should provide us with a hint about the profit outlook of a particular stock.
After the passage of the tax act, Wall Street offered a classic shrug of the shoulders. All year long, the stock market has been “pricing in” the probability of a corporate tax cut. Now that it has passed, investors are moving on to other issues. As far as share prices as concerned, we will not know the impact of the new tax law until the first quarter’s earnings reports start to roll in during April. Meanwhile, the new tax law is triggering a fresh round of debate among investors. Will lower tax rates, coming at a time of general economic strength, prompt a rise in open-market interest rates (bond yields)? We want to keep an open mind to the possibility that the long-term (secular) trend for bond yields has finally turned upward. However, we also know that the bond bears have sounded numerous false alarms in recent years.
During the third and fourth quarter, performance gains were somewhat muted by the larger-than normal cash levels throughout all of our portfolios. We have trimmed or sold numerous successful investments over the last year but found few qualifying replacements. Our cash levels, therefore, remain our largest positions. Liquidity in a portfolio is a byproduct of our bottom up process. This liquidity is reserved to take advantage of new qualifying positions as we have done in the past when cash has been this high. Stocks become discounted for numerous reasons ranging from simple, company-specific earnings misses to complex, broad geopolitical or natural events that generate fear in particular industries or the overall markets.
During the quarter, we continued to raise cash by selling stocks that reached their appraised values or could cause problems in 2018. We sold our entire positions in Seacor Marine Holdings Inc. (SMHI), Franklin Resources Inc. (BEN), SSE PLC (SSEZY), Western Assets Emerging Market Fund (EMD), Aberdeen Asia-Pacific Income Fund Inc. (FAX), and Kroger Company (KR). On the buy side, we added two new positions in the Equity portion of our portfolios including Walgreens Boots Alliance Inc. (WBA), a pharmacy-led health and wellbeing company, and Mondelez International Inc. (MDLZ), a snack company that manufactures and markets snack food and beverage products for consumers. In the Fixed Income portion of our portfolios, we added Kraft Heinz Co (KHC), a food and beverage company, Mattel Inc. (MAT), a company that manufactures and markets a range of toy products around the world and Verizon Communications Inc. (VZ), a holding company that provides communications, information and entertainment products and services to consumers, businesses and governmental agencies.
As far as our investment strategy is concerned, we continue to maintain our standard two-pronged strategy, which is to maintain a substantial exposure to common stocks (and mutual funds) as long as there is a reasonable prospect for double-digit returns. Furthermore, we will continue to take profits more frequently so that we could gradually increase our weighting in cash as well as the fixed income portion of our portfolios. During the quarter, we continued with our average asset allocation mix of 40%-50% Equity, 40%-50% Fixed Income and 0%-20% cash for most of the portfolios.
We want to thank all of you for giving our firm the opportunity to serve you. We thank you very much for the trust and confidence you have placed in our firm as it is always appreciated. Please contact us should you have any questions or comments. Also, we want to invite you to visit our website at www.farmandinvestments.com for a quick Retirement calculator, our latest firm news, and Market Commentary archives. May you and your loved ones have a healthy, happy and prosperous New Year.