2017 ended up being another strong year for equity markets. The S&P 500 and Dow Jones indices achieved record levels, up a respective 21.8% and 28.1% for the year including dividends. It was a year characterized by ultra-low volatility, three Fed rate hikes, low inflation and unemployment levels, US tax cuts, and cryptocurrency and cannabis mania. Most alternative asset managers materially underperformed the major US and Canadian indices (as at November 2017, the Scotiabank Canadian Hedge Fund Index was up 4.01% YTD). While our two long/short funds also fell under this category of underperformance, we can’t help but question whether this equity bull market, now almost 9 years long, can continue indefinitely. In our view, the case for diversifying your 100% long only equity portfolio has never been stronger.
Several themes dominated the month of November as it relates to your investments with the ongoing debate around tax reform in the US and OPEC policy being the most relevant. The concept of tax reform has been analyzed to death, so we won’t spend a great deal of time on it here; however, we would be remiss if we didn’t point out that it’s yet another bullish data point, allowing the narrative of economic strength to continue and push stocks even higher. While we were admittedly too cautious regarding equities entering 2017, our current belief is that in spite of high valuations by historical standards and what appears to be widespread bullishness, markets should continue to grind higher in the absence of an exogenous shock, given the complete lack of worthwhile alternatives to equities and reasonable economic growth around the world. That said, we do not believe this is the appropriate time in the cycle to be making levered or aggressive bets on stocks. We believe that focusing on specific high-quality companies and sectors with tailwinds should yield outperformance.
Stocks enjoyed another good month during October, with Canadian markets joining US indices in hitting new highs. While large cap growth stocks led US averages, a falling Canadian dollar, one that has now given up half of its summer advance, plus gains in commodity prices, combined to enable value stocks to also work well in Canada. Each of the two Forge First funds delivered positive net returns for October.
Everything appeared to be great for stocks during September as oil climbed 9% and Trump tax talk buoyed small caps and offshore cash rich tech giants. In addition, with inflation remaining quiescent, bank stocks rose on hawkish talk from Fed Chair Janet Yellen. Both funds at Forge First also delivered positive net returns for the month.