January 31, 2019
As patient investors with a tortoise as our corporate mascot, it should come as no surprise that we would not pay close attention to occurrences in any given month. Given our long-term perspective and multi-year holding periods, 30 days is more like a nano-second in the life of an Ariel investment. And yet, as the stock market began 2019 with a decisive pivot from 2018’s fourth quarter rout—January caught our attention.
As the February 4th edition of Barron’s so simply summarized, “Worst to first . . . Last month turned out to be the best January for the S&P 500 since 1987 . . . [which] followed the worst December since 1931.” 1 After hitting a low on December 24th, the article goes on to explain, “From Christmas Eve through Jan. 31, stocks appreciated by 15.9%, or $4 trillion.” 2
While a number of factors might explain this reversal of fortune, the market appears to be telegraphing a more rational future. In our view, “rational” is the operative word when contrasted with the fears that weighed heavily on the market as 2018 drew to a close. While anything is possible, at this point, another prolonged government shutdown appears unlikely, nor do we seem to be on the brink of a full blown Chinese trade war. Instead, rational political compromises and policies appear to be more probable. Likewise, the Federal Reserve recently telegraphed a more dovish “wait and see” approach to future rate hikes as opposed to its more hawkish inflation fighting stance last year.
We are not surprised by this sea change. As we wrote in our year-end letter, despite the dismal fourth quarter returns, we believed we were living through a “sick stock market in a healthy economy” and that strong fundamentals would ultimately win out. 3 We wrote this on the heels of a third quarter letter where we challenged the conventional wisdom of a momentum-driven market fueling the most popular names—more specifically the tech giants known as the FAANG stocks. As we noted, “Facebook (FB), Amazon (AMZN), Apple (APPL), Netflix (NFLX) and Alphabet (GOOGL)—have been the darlings of the momentum investing crowd . . . Our search for widely misunderstood, ignored or underfollowed franchises drives us away from crowded trades. As such, we do not and would not ever own “frothy” names that have been bid up by investor enthusiasm as opposed to solid company fundamentals. This may mean we miss out when the market gets swept up in a temporary (or not so temporary) mania. But in the end, we also avoid the dreaded hangover.” 4
On that last point, there also appears to be a shift in market leadership and investor affection. Here again, Barron’s notes, “There’s some evidence that investors are growing more interested in stock-picking, and in the kinds of value stocks that have been left behind by the momentum-driven bull market.” 5 Once again, we will highlight our closing comments from our fourth quarter letter, “. . . as uncomfortable as they can be, short-term disruptions like the fourth quarter sell-off are not a time for hand-wringing. Instead, it is a time to methodically and thoughtfully shop for years of future returns.” 6 Indeed, early gains in January are reaffirming—but only one month in a long, patient investing journey.
Past performance does not guarantee future results. The opinions expressed are current as of the date of this commentary but are subject to change. The details offered in this commentary do not provide information reasonably sufficient upon which to base an investment decision and should not be considered a recommendation to purchase or sell any particular security. None of the stocks mentioned are held in Ariel’s portfolios. Portfolio holdings are subject to change.
1 Forsyth, Randall W. “The Fed Fuels a Dizzy Ride.” Barron’s. February 4, 2019.
2 Forsyth, Randall W. “The Fed Fuels a Dizzy Ride.” Barron’s. February 4, 2019.
3 Ariel 4Q18 Quarterly Letter.
4 Ariel 3Q18 Quarterly Letter.
5 Levison, Ben. “Dow Gains 327 Points as Powell Powers Market.” Barron’s. February 4, 2019.
6 Ariel 4Q18 Quarterly Letter.