March 2019 was the third consecutive month of gains for North American equity indices, capping one of the strongest ever starts to a year. Of course this reversed one of the worst ever finishes to a year so if you were an index investor you could have taken the last half year off and saved yourself the stress. March also represented the third consecutive month of gains for our investors in each of our two long short equity hedge funds at Forge First, though during March we admittedly found ourselves at odds with the engine that was driving this rally. Our Long Short LP CL F Lead Series (“FFLSLP”) returned +0.49% net of fees while the Multi Strategy LP CL F Lead Series (“FFMSLP”) gained +0.37% post fees. Similar to the previous month positive drivers of this performance were generated from a wide range of industries to be discussed later.
February marked another positive month for the funds at Forge First Asset Management with the Forge First Long Short LP CL F Lead Series (“FFLSLP”) returning +2.34% net of fees and the Forge First Multi-Strategy Fund CL F Lead Series (“FFMSLP”) clocking in at +1.74% net. Not unlike January, the positive contributions came from a variety of exposures that we believe speak to our ability to build a diversified portfolio but stay within our knowledge base. To wit, our top five positive stock contributions came from four disparate sectors; gold mining, technology, industrials and energy.
What a difference a month makes. While December found itself in the conversation for the “worst month ever”, January represented the polar opposite with stocks rallying in an aggressive and unrelenting fashion throughout the month. Amusingly, the violent swings in equities can best be explained by changes in sentiment rather than changes in any particular fundamentals as we believe investors have chosen to swing back and forth between optimism, pessimism, back to optimism again despite no substantive change in the backdrop. Of course there have been some changes to economic numbers but nothing that warrants a 15% round trip in stocks. Traders’ obsession with the language used by the Federal Reserve of the U.S. has reached a fever pitch with the new interpretation being that Powell the uber-dove will keep the cheap money spigots open forever while signaling a potential reduction of the balance sheet normalization program the Fed had undertaken.
Well, the dust has settled and Forge First has concluded a great year with each of our funds providing solid net returns to our investors. The S&P 500 on the other hand suffered one of its worst months ever, finishing down 9% for December 2018. This of course could have been much worse if not for the heroic rally that brought stocks back from their lows on Christmas Eve, at which point US stocks were down 14.82% on the month. By comparison Canadian stocks fell a paltry 5.75% over the month (9.5% down at their worst, also Christmas Eve). This sort of startling volatility is the result of a great divergence in opinions within the financial arena at a time when liquidity has become increasingly scarce. The disagreement is palpable and characterized by the violent moves both up and down.
Is this nothing more than a harsh correction or were the September highs the end of the bull market? And yes while it is worth pointing out that US stocks did briefly hit the definition of a bear market last month, declining 20% from their highs, the question we’re asking, and aim to decipher, is whether there’s a further 20% downdraft or is the next move, be it up or down, more modest in nature.