Even the bulls who foresaw additional upside in equities admitted stocks were far from cheap entering 2018. Then, January 2018 delivered stunning upside in US stocks, epitomized by the 15.5% advance in the FANG index, catapulting the S&P 500 deep into overbought territory at 7% and 14% respectively above its 50‑ and 200‑day moving average. Coincidentally, as shown in Figure 2, the frequency that the term “market bubble” appeared in the financial press climbed back to levels last seen during 2006 and many fund managers remained overweight equities...
January started off as one of the strongest months for equities in the history of capital markets with stocks marching relentlessly higher amid investor optimism and non-existent volatility. Continued strong performance in the US economy combined with positive earnings revisions from US tax reform helped buoy the S&P 500 5.7% for the month, the best start to the year in 31 years. Meanwhile, here in Canada, uncertainty surrounding NAFTA weighed on the TSX, resulting in a loss of 1.4% for January. Both of the Forge First funds generated positive net returns for January.
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.