1Q 2018 Quarterly Letter

It’s been an interesting start to the year, to say the least. As we have been forecasting, volatility finally returned to the market.  After a strong start in January, the market corrected in February and is now trying to find its footing. It is extremely important to remember that volatility, although not comfortable, is a fundamental part of investing and should be expected. Long-term investing in quality companies affords us the luxury to stay invested through volatile times. We plan to employ this same strategy that has served our clients well over 35 years of investing in volatile markets.
Along with the volatility in the stock market, interest rates have been another topic on investors’ minds. After many years of easy monetary policies that pushed interest rates to historic lows following the “Great Recession”, the Federal Reserve finally began raising short-term interest rates about 18 months ago. This has resulted in short-term rates approaching 2%; a rate not seen in years. With the 10-year Treasury rate at approximately 2.85%, fixed income has once again become a viable investing option for income investors.
With the move up in short-term rates, we wanted to take a moment to address an asset class that few have talked about in recent years: Cash. For clarification, we consider cash to be any short-term, low-risk investment such as Treasury bills, bank CD’s and money market mutual funds. Although we do not support cash as a long-term investment, we do believe it is a very important asset class for lowering volatility, providing liquidity for income needs, and to preserve capital while searching for new investment opportunities. And with the Fed signaling more rate hikes ahead, we believe investing in longer-term fixed income securities is not a prudent move at this time. Therefore, we are investing most fixed income portfolios in short-term securities. This should allow us to reinvest at higher rates as the Fed continues to raise rates. It will also provide us flexibility when presented with more attractive opportunities in the stock market.
Please feel free to give us a call with any questions.

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