Game Changer:

Nobody saw this coming, but in the collective wisdom and unemotional ways of the market, it didn’t take long to comprehend that this was monumental. The combination of a highly improbable election outcome with such wide-ranging policy consequences was, and is still, startling.  We’re sure there are parallels somewhere in modern history, but they elude us at the moment.

Currently in the midst of its eighth year, this bull market is the second longest on record. Conventional wisdom would suggest this puts us in the late stages of a traditional business cycle. The current cycle, however, has not followed the traditional pattern. It was...

Confidence Rising:

Stocks closed higher in the third quarter amidst a relatively benign backdrop of news and events. In the context of stagnant growth and negative earnings trends, advances like this would seem to be driven more by sentiment and positioning than a material improvement in economic and corporate fundamentals.


Stocks completed a near 6% round trip in a rousing final week of the second quarter, leaving most of the broad equity averages at slightly positive levels for the three months.  The U.K. vote to leave the European Union clearly caught investors leaning the wrong way, triggering panic across global markets.  The abrupt recovery that followed was almost equally surprising.

Something for Everyone:

Stocks declined over 10% in the quarter.  They also gained more than 10%.  Oil dropped 30% and gained almost 50% in the quarter.  The Fed advised to expect four more rate hikes this year and then took that off the table.  China both devalued its currency and strengthened its currency in the quarter.  In the end, the broad stock market eked out a small gain, leaving investors relieved, notwithstanding symptoms of whiplash.

This has clearly been a difficult start to the year, as volatility has picked up meaningfully from an extended period of relatively calm markets. For many of us, the equity market meltdowns of 2000-2002 and 2008-2009 are fresh in our memories, and it is natural to be frightened and emotional about the possibility of another similar circumstance unfolding now. Count us among those who are not anxious to go through those markets again.

The unusually tight trading range that defined the stock market in the first half of the year gave way to the downside in the third quarter. Slowing global growth became a flashpoint of concern midway through the quarter, triggered by disappointing economic data out of China, the continued erosion in oil prices and an untimely Fed decision to defer on imminent rate hikes.

In contrast to strongly positive returns during the past twelve months for the Meritage Value and Growth Equity strategies, the Yield-Focus strategy has experienced a tough year. Yield equity strategies in general, and our differentiated Yield-Focus strategy specifically, reached a very strong multi-year relative performance peak approximately one year ago. Simply stated, the basic reason for the divergence over the past year relates to the available market opportunities for each specific strategy.

Beware Greeks Bearing Gifts (or Referendums)

A relatively quiet quarter for stocks was interrupted at quarter-end as the charade of negotiations around Greece’s solvency had an untimely reality check. Modest equity gains that had accumulated over the quarter were given back in the process, leaving equity returns flat to slightly lower for the three months. Prior to this hiccup, two earlier sources of volatility, falling oil prices and a rising dollar, had moderated in the second quarter, creating a more stable backdrop.