Quarter 2, 2018 Investment Brief

Stocks were a mixed bag in the second quarter; domestic shares gained as international developed and emerging market equities retreated.  Small companies headquartered in the US were the perceived winners in trade war developments because they are less likely to derive revenue from outside the country.  In particular, Royce Special Equity’s brand of high return-on-equity investing saw a return to favor beginning in May.  As for the international funds, both First Eagle and IVA reported low exposure to areas that may be directly impacted by tariffs and see the resulting volatility as a potential opportunity to initiate new positions or add to existing ones. 

Interest rates are now in decidedly positive territory.  Short-term rates have in fact almost doubled over the past nine months.  We are increasingly utilizing money market funds and FDIC-insured certificates of deposit as yields have become relatively attractive.  Though welcomed by savers, higher rates may at the same time cause heavily-indebted companies to be pinched by the additional interest expense.  The prevalence of “zombie” companies (roughly 16% of US firms that cannot afford to make interest payments out of operating earnings according to Glenmede) encourages us to continue to be very selective in our equity exposure. 

One company that is certainly no zombie is Apple, noteworthy this quarter because of its proximity to trillion dollar status (meaning you would need a cool trill to buy all of its shares).  With revenue now greater than the GDP of New Zealand, Apple is covered by some 30-plus equity analysts.  Contrast that to the one-third of the Royce Special Equity portfolio that is made up of companies with little or no analyst coverage.  While the market these days is seemingly driven by a small number of headline-grabbing stocks, we think it makes sense to look for investment opportunities that are flying under the radar.  After all, even the Apples and Amazons of the world were once lightly-regarded small caps. 

Thank you for allowing us to be of service.

Aaron Pettersen, CFA, CFP®

The foregoing content reflects the opinions of NorthWest Financial Services and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Past performance is not a guarantee of future results. All investing involves risk, including the potential for loss of principal. There is no guarantee that any strategy will be successful.