Quarterly Letter, October 2017

By Ron Muhlenkamp and Jeff Muhlenkamp, Portfolio Managers

From a market perspective, this has been a quiet summer. As of 9/30/2017, the S&P 500* was up 6.63% over the last six months with hardly a dip. Low economic growth continues on a global basis, none of the major central banks have altered course in any fashion, inflation remains low, second quarter earnings came in nicely, etc. We won’t bore you (this time!) by enumerating the things we’re watching that haven’t changed since we wrote about them in June. There have been a couple of surprises: three destructive hurricanes and escalating tensions with North Korea (which the markets have mostly ignored). We believe that while the hurricanes have had a massive impact on the affected areas, their impact on the national economy will be fairly small and temporary. We believe war with North Korea is unlikely. We’ll keep an eye on developments and update our assessment as events unfold.

In March, we highlighted the increase in small business optimism that accompanied the election results. Looking at the latest numbers, business optimism remains at a high level in spite of (because of?) paralysis in Washington. A decline in business optimism would be of concern, but it is holding up nicely. Speaking of Washington, the broad outlines of the proposed tax reform were released in late September and, based on what we saw, it looks like an improvement on the existing situation. We have no idea, however, how much of it will actually be enacted or when.

The markets remain on the expensive side and that’s making a lot of investors of all stripes nervous. In an odd way investor nervousness is itself a bit reassuring. It could prevent some of the risky behavior we tend to see when investors are wildly optimistic and convinced they can’t lose (recall the internet bubble, the housing bubble, and currently the enthusiasm around Bitcoin and its siblings). If the market is making you nervous, you might consider reviewing your expectations of the market and your financial plans and make sure that you are prepared for the inevitable downturn. Using the four seasons as an analogy, we estimate we’re in late summer and while we don’t know exactly when winter will arrive, we know it’s coming, so it’s appropriate to prepare for it. Give us a call if you’d like to discuss these topics in more detail, we’d love to hear from you.

Until next quarter…

The comments made in this commentary are opinions and are not intended to be investment advice or a forecast of future events.

Refer to the SMA All-Cap Value Fact Sheet for the Top 20 Holdings and performance data as of the most recent quarter-end.

*S&P 500 Index is a widely recognized, unmanaged index of common stock prices. The S&P 500 Index is weighted by market value and its performance is thought to be representative of the stock market as a whole. You cannot invest directly in an index.