The Markets Loved A Dovish Fed

Gold Leaf Capital Investment Newsletter (More)


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Late last fall, Fed Chairman Powell scared the bejesus out the markets when he preached a hard line against inflation.  The Fed, he said, would raise rates and would reverse Quantitative Easing (QE) which had provided so much cheap capital.  The markets swooned; the 2018 4Q S&P 500 lost -13.5%.  But, in January, Mr. Powell had his come-to-Jesus insight.  The economy was not over heating; inflation was subdued.  The case for raising rates had weakened; the Fed could be patient.

The stock market loved this dovish Fed and gained +13.65% for this year’s 1Q.  All sectors were positive with tech gaining +19.4%.  Both the industrials and the real estate sector were up exactly +16.6%.  The sluggard of the Q was healthcare – rising only +6.1%.

Our largest gainer was Portola, the drug company producing a blood thinner reversal agent.  The stock was down in 2018 on regulatory delays.  Those issues are resolved; in fact, the drug, already approved in the U.S., received E.U. approval this February.  The stock gained +78% in the Q.  Stratasys, the 3D printing manufacturer, rose +32%.  Many of our interest rate sensitive securities performed well in light of the newly dovish Fed.  Our one dog for the Q was Aratana, maker of animal therapeutics.  A hedge fund trimmed its position, and the stock dropped -41%.  We judge the story to still be intact; we selectively added more taking advantage of the dip.

Our buys and sells for the Q were centered around three themes: buying distressed tech following the 4Q’s rout, loading up on income producing securities given the Fed’s outlook, and improving credit quality across the board.  In tech, we purchased Microsoft which is gaining the in the cloud wars.  We bought Iron Mountain for its yield and its ownership of big data centers.  We bought BP for its yield and improving cash flows.  We purchased a variety of fixed income vehicles trying to get ahead of the day when the Fed actually starts to lower rates.

We sold numerous electric utilities after they rallied on the Fed’s dovish announcement.  They had gained so much that they ceased to materially add to income.  We sold some closed end income funds that were too low on the credit quality spectrum.  Finally, we exited a great number of shorter maturities as a way of locking in higher yields now.

April 1, 2019                                                                               Paul F. Rodgers, CFA

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