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Update – Spring 2019

Back from the Brink

Market Rebound
Equity markets rebounded across the board during the first quarter of 2019 with the
Dow Jones Industrial Average rallying 11.7%; this was the best quarterly return for the
index since 2009 and the best start to the year since 1998. This rally followed a dramatic
selloff in the fourth quarter of 2018 which was fueled by fears surrounding the economy,
monetary policy, and political uncertainty. These fears have been somewhat alleviated as
the Federal Reserve shifted toward a dovish stance, economic slowdown concerns
eased, and prospects for a US-China trade agreement improved.

Pause in Monetary Policy


After 5 consecutive quarterly rate hikes, the Federal Reserve indicated it was time for a
pause at the current target range of 2.25-2.5%, with no expected rate hikes in 2019.
Additionally, the Fed plans to cease its balance sheet asset reduction in September.
These dovish moves follow a hawkish end to 2018. In December, the Fed hiked rates and
predicted two more in 2019 at a time when the committee was forecasting a slowdown
in the US economy. The mismatch between the Fed’s actions and its expectations for the
economy drove the market rout during the fourth quarter.

In contrast, the Fed shifted to a dovish stance in the first quarter of 2019, coinciding with
their softer economic forecasts. Global markets welcomed the change. U.S. and
international equity markets, high yield and corporate bonds, and commodities all rallied
on the Fed’s patience toward monetary policy.

Economic Fundamentals Improving


Despite the Fed’s reduction to its GDP forecasts — from 2.3% to 2.1% in 2019 and from
2.0% to 1.9% in 2020— recent economic data have improved. The government
shutdown affected initial Q1 GDP readings but have now risen to 2% due to stronger
retail sales, construction spending, and manufacturing data. The recent job reports have
been volatile, but on average, the economy has added 180,000 jobs per month through
March. Wages remain manageable at 3.2% with unemployment at a historic low of 3.8%.

Another concern has been the slowdown in China, the world’s largest contributor to
global growth. Recently, the economy has posted stronger data. For the first time in four
months, China’s manufacturing sector expanded. The recent upturn for the two
economies may be a result of improved relations between the two countries.

Political Progress
Politics have also played a significant role in the market rally. Although no concrete
agreement has been reached between the US and China, the countries are actively in
discussion. The prospect of a deal has influenced economic data and stock markets.
Chinese equities, as measured by the MSCI China Index, have rallied 18% thus far this
year. Progress has also been made within the US. The US government reopened after its
longest shut-down in history. Economists worried that growth would be flat in Q1 due to
the shutdown, but are starting to increase estimates. Additionally, the overhang of the
Mueller probe may be behind us.

What’s Next for Markets?


The accommodative Federal Reserve actions have been a significant contributor to
market performance recently. The Fed cited low inflation and lower US and global
growth as reasons for a pause in its tightening. However, economic fundamentals are
improving. Stronger GDP, manufacturing, and jobs data could enable the Fed to revise its
economic forecasts and subsequently change course again toward higher rates.
Although positive economic data is good for markets, a hawkish Fed could stall this rally.

As always, risks to the economy and markets remain. On the political front, uncertainty
surrounding US-China relations and the threat of shutting down the US-Mexico border
could disrupt manufacturing and trade. With markets rallying double-digits to start the
year, there might be less room to run this year. However, valuations remain reasonable,
inflation is very manageable, and the economy is solid.

Looking Forward
The first quarter of 2019 reassured investors following the market selloff at the end of
2018. Although valuations have risen, they are trading close to 10-year averages. The
rally could continue if economic and company data is strong, central banks exhibit
patience, and geopolitical progress is made.

Transformative Growth Leaders Strategy Update


This new strategy was implemented during the second quarter of 2016 and involves a
focused basket of roughly 15 stocks with the expectation these companies’ underlying
growth will be faster and superior to that of the overall economy and the specific
markets they operate in. These companies have fashioned new products and innovative
offerings, spawned new industries and sparked change in consumer and business habits
and practices. Most of these companies are household names, have dominant brands,
are leaders in their respective markets and industries, and in many ways are part of, and
indeed have changed, our daily lives. To manage risk, the “Transformative Growth
Leaders” segment of the portfolio has no more than a 10% overall allocation.

Since implementation of this stock portfolio, this basket of stocks has gained 72% in
value, nicely ahead of the broader market, as evidenced by the S&P 500, which has
generated a 35% return during the same time period. A performance table is listed
below:

3/31/2019
Purchase Close Return%
Alibaba $130.58 $182.45 39.7%
Amazon $716.46 $1,780.75 148.5%
Apple $93.08 $189.95 104.1%
Costco Wholesale $139.71 $242.14 73.3%
Disney $97.80 $111.03 13.5%
Facebook $149.95 $166.69 11.2%
Google (“Alphabet”) $704.98 $1,176.89 66.9%
Mastercard $89.25 $235.45 163.8%
Netflix $90.84 $356.56 292.5%
Nike $57.44 $84.21 46.6%
Starbucks $52.43 $74.34 41.8%
Tencent Holdings $36.29 $45.98 26.7%
Tesla Motors $210.20 $279.86 33.1%
Under Armour $26.40 $21.14 -19.9%
Visa $74.25 $156.19 110.4%

The quarter saw a notable development within the portfolio – Visa has gained over
100% in appreciation from our initial investment, and half of the position in this holding
was sold as these gains occurred within a relatively short period of time (the position
was initiated within the past 24 months). This enabled us to cash out our initial
investment in the company, and let our winnings ride (“playing with the house’s money”,
as the old saying goes). Visa joins Netflix, Amazon, Apple and Mastercard as stocks that
have more than doubled since we made initial investments in them.

Looking forward, the economic and earnings environment should support a continuation
of the bull market, albeit with more volatility and some heightened risks in the near
term. Even in this challenged environment, really strong market leaders continue to
grow and increase earnings.

Amin Khakiani
April 18, 2019