Domestic Markets – 2Q18 Review

Volatility is back. Is it a new paradigm or return to trend?

U.S. stocks moved higher in the second quarter, as investors bid up equities in response to a strong corporate earnings season.  The S&P 500 Index gained 3.4% for the quarter, while the small-cap Russell 2000 Index returned 7.8%.  The outperformance of small-cap companies was primarily in response to heightened trade tensions – as smaller companies tend to generate the bulk of their revenues from within the U.S. and thus are less impacted by tariffs or a stronger dollar.

Although equities (as measured by the S&P 500) are now in the green on a year-to-date basis, it is worth noting that the gain has been driven by a very narrow set of companies.  According to Goldman Sachs, more than 100% of the gain in the S&P 500 was driven by just ten stocks – including the five ‘FAANG’ constituents of Facebook, Amazon, Apple, Netflix and Google (Alphabet).  In a ‘know what you own’ public service announcement, the Technology sector now comprises almost 26% of the S&P 500; this compares to the prior peak of 33% in the 2000 tech bubble era.  Granted, many tech companies are more profitable vs. this past era – but mean reversion can provide a powerful wake-up call.

Tariff rhetoric has been in place for much of 2018, but investors’ anticipatory anxiety levels escalated in June.  To this point, the market has viewed the prospect of tariffs as a negotiating ploy by the White House – which may still be the case.  Even so, for this to be an effective tactic, there must be some willingness to implement.  The primary risk for the markets is that these tariffs “reverse” key stimulative benefits of tax reform and the general economic momentum.   Defenders of tariffs attempt to talk down the financial impact on consumers (e.g., an extra $.10-$.12 on a six-pack of beer); however, the potentially more damaging impact on the economy could be a decline in business confidence – which can delay investments and related expansion plans.

Given the fluid/tweet-by-tweet nature of these discussions, it would be premature to draw any firm investment conclusions.  While the total “cost” of trade disputes still seem low – current estimates are a hit to U.S. GDP in the 0.3-0.4% range – it will be important for the market to see a softening of stances.  Cambiar continues to monitor the situation and gauge the potential impact to our companies.  A company’s trade situation in and of itself is unlikely to lead to a portfolio decision, but theoretically could tip the balance, all else being equal.

Disclosures

Certain information contained in this communication constitutes “forward-looking statements”, which are based on Cambiar’s beliefs, as well as certain assumptions concerning future events, using information currently available to Cambiar.  Due to market risk and uncertainties, actual events, results or performance may differ materially from that reflected or contemplated in such forward-looking statements.  The information provided is not intended to be, and should not be construed as, investment, legal or tax advice.  Nothing contained herein should be construed as a recommendation or endorsement to buy or sell any security, investment or portfolio allocation.  Securities highlighted or discussed have been selected to illustrate Cambiar’s investment approach and/or market outlook. The portfolios are actively managed and securities discussed may or may not be held in client portfolios at any given time, do not represent all of the securities purchased, sold, or recommended by Cambiar, and the reader should not assume that investments in the securities identified and discussed were or will be profitable.

Any characteristics included are for illustrative purposes and accordingly, no assumptions or comparisons should be made based upon these ratios. Statistics/charts are based upon third-party sources that are deemed reliable; however, Cambiar does not guarantee its accuracy or completeness.  As with any investments, there are risks to be considered.  Past performance is no indication of future results.  All material is provided for informational purposes only and there is no guarantee that any opinions expressed herein will be valid beyond the date of this communication.