Evaluating current market volatility
Joel G. Oldham

The market has experienced renewed volatility over the past few weeks. Trade wars, interest rates, and privacy have dominated the headlines. When the Trump administration announced over $50 billion in tariffs on imports made in China, the DJIA(Dow) dropped more than 1,100 points. Only to be followed by the Dow rising almost 3% when the Chinese said they were open to improving access to their markets by American companies. The Federal Reserve raised interest rates by 25 basis points last month, and the new Federal Reserve Chairman Jerome Powell has a more hawkish or positive outlook on the US economy. The expectation is that we will see a couple of additional increases to the federal funds rate in 2018. Lastly, Facebook was in the news over concerns regarding how they protected their user’s data, and this had an impact on the entire technology sector including our holdings in Alphabet (Google), Microsoft and Oracle. We feel these declines are only temporary and these pullbacks are creating an opportunity to add positions for new and existing clients.

During the first quarter, this news, along with the typical hysteria created by the media, has caused the DOW and S&P 500 to move more than 1% in either direction more than in all of 2017. This can be very unnerving and unsettling. But remember, all of the investments that we’ve carefully selected for your portfolio are for the long-term. The markets typically experience a correction, that’s a 10% decline from the top, every 18-24 months. And the periods where we’ve experienced a decline of 10% or greater are typically short. The best advice is to ignore the noise, remember that timing the market is nearly impossible and to stay focused on your long-term goals. The overall health of the economy has never been stronger, and we expect earnings to continue to grow in 2018.

After our analysis of the Tax Cuts and Jobs Act of 2017, we’ve identified the 3 companies in our portfolio we feel could benefit most from the tax cuts: Delta Airlines, Spirit AeroSystems, and United Rentals. All 3 of these companies, as well as other companies we’re invested in, could see their earnings increase by as much as 17%, just from the reduction of the corporate tax rate down to 21%. This doesn’t include earnings growth from stock buybacks and growing their respective businesses. This act should substantially increase cash flow, and these companies will be able to increase their stock buyback programs, which will help accelerate their earnings per share growth.

We recently added a new company to the portfolio. D. R. Horton, Inc. (DHI) has been the leading home builder in the U.S. for 16 consecutive years. For their first quarter of 2018, D. R. Horton grew their earnings by 23%, their revenue by 15%, and raised their cash flow guidance by 40% primarily due to the new tax law. Industry data is fairly clear that the preference of today’s buyer is for new construction as opposed to existing homes, and with the population of millennials not expected to max out until around 2036, the customer base for builders like D.R. Horton remains very strong for years to come.