Portfolio Update March Q1: Tech stocks shine, Fed interest rate trajectory swings to a cut

Portfolio NAV jumps 12.3% in Q1 as markets topple old records

Just like that, we’ve already seen out the first quarter of 2019, and what a start to the year it has been. Cast back to the opening days of January, few could have predicted such a turnaround following an abysmal revenue downgrade from Apple (APPL) and underwhelming US factory data.

But the stock market is flying high, notching up achievement after achievement. As investors piled back into riskier assets the S&P 500 recorded its best quarter in the last decade, and the best opening quarter since 1998.

As it turns out, the key to massaging the nerves of the market has, in many respects, been soothing reassurances - none more so than that first communicated by the Federal Reserve in January around a more cautious path to lifting rates, and reaffirmed at its March meeting. Given mixed economic data, plus the angst markets feel every time slowing global growth gets a mention, we don’t see a catalyst for a rate hike, rather a rate cut.

The US government - when not shut down - has also been keen to see to it that markets held their rebound. At the hint of any anxiety, the Oval Office has been quick to casually remind an impatient market that US-China trade negotiations are progressing well - notwithstanding the lack of detail. Here we are, with discussions longer than expected, it almost seemed an April Fools’ Day prank was in store for the market.

The treasury yield curve for 3 month and 10 year bonds inverted in March for the first time since 2007, often deemed a recession warning sign. Our outlook remains upbeat. Company earnings have largely outperformed, energy prices are rising, and US economy fundamentals appear fairly stable, even if subdued. As far as the latter, jobs growth has been excellent, despite recent hiring data slipping. There has been modest increases in wages and consumer confidence, albeit inflation, housing and manufacturing remain quiet.

The highs and lows of corporate earnings

With the quarter concluding, only a small selection of companies reported earnings in March. Among higher profile businesses, there were mixed results.

Target (TGT) and Costco (COST) highlight the retail sector isn’t prepared to roll over just yet. TGT announced its best result in years, with higher sales, earnings and store traffic, while COST produced a resounding earnings beat. Both climbed 10.5% during March. We attribute their impressive results to price positioning as big-box staple retailers, and favour Costco.

Strong growth in China helped Nike (NKE) top earnings forecasts and meet revenue targets, but it lost 6.1% due to subdued North American growth. Expectations were likely built into its all-time high share price before reporting, but we’re excited by China growth prospects.

Despite surpassing consensus targets leading software companies Salesforce (CRM) and Adobe (ADBE) came under scrutiny as they tamed outlooks. Both businesses, with expectations reset and a strong history of beats, recovered from their sell-offs.

Fedex (FDX) missed revenue and EPS forecasts, also lowering its 2019 earnings guidance for the second time in 3 months. While a 5% slide in shares reversed by month’s end, we would be concerned by passive global economic growth, competition levels and squeezed margins.

March Quarter