Through the end of January 2018, the stock market has risen in a nearly uninterrupted fashion. While the macroeconomic backdrop is generally positive – coordinated global growth, the passage of tax cuts in the US – we knew that it could not continue this way indefinitely.
In this case, “good news” (strong economic data) may lead to “bad news” – a resurgence of inflation (aided by a tight labor market and weak dollar) and more aggressive rate hiking from the Fed in order to contain it. This has led to a resurgence in volatility in the market, mostly to the downside, with the Dow recorded several multi hundred or even thousand point declines over the last week. The current market swings may be further amplified by the proliferation of ETFs in recent years.
As value investors, we believe “Mr. Market” should serve us rather than inform us of a company’s value. We continue to focus on franchise, cash generating businesses trading at a discount to Private Market Value with one or more catalysts that can surface value. When these businesses trade at more attractive prices, we seek to own more of them.
We are not stock market prognosticators, though the market has seemed overdue for a pullback for some time. We will navigate this period of increased volatility by following our time-tested, bottom-up research process that has served our clients well for over 40 years.