The Us Continues to Look Attractive, Looking Backward and Forward

2019 was a triumphant year for the US large cap equity market, with the S&P500 index up 31% on a total return basis. The resolution of two major concerns in the year, namely the US Fed being too aggressive on rate hikes, and the US/China trade relationship hanging in a total impasse, drove the market higher, particularly in 1st and 4th quarter (up 13.65% and 9.07% respectively). Fed Chairman Powell in early January indicated inflation was muted and the central bank would be in no hurry to raise rates. In late March, the Fed formally trimmed the number of rate increase expectations in 2019 from two to zero. Then during the rest of 2019, the Fed actually cut its fund rates three times to a targeted range of 1.50-1.75%, citing uncertainty surrounding trade. In July, the Fed also stopped shrinking its $4 trillion asset portfolio. The trade war created some market volatility, as US/China trade talks took many dramatic turns rather than following a linear path. The two sides were supposedly ready to sign a comprehensive deal in early May before President Trump suddenly tweeted on a Sunday that he would raise tariffs on $200 billion of Chinese imports from 10% to 25%, blaming China for trying to renegotiate the trade deal. On August 1, Trump announced new tariffs on $300 billion of additional Chinese imports. In the following days, the Chinese yuan slipped to below 7 Yuan per USD, a symbolic threshold and its weakest point since 2008. In early October, however, Trump announced the US and China have reached agreement on a phase one deal. In mid December, the US formally canceled tariffs that were supposed to go into effect before year end, and agreed to roll back existing tariffs in phases. In exchange, China promised to ramp up its purchases of U.S. farm products to $40-$50 billion per year. The two sides will formally sign the phase one deal later this month.

In 2019, the Valuation 50 strategy has outperformed the S&P500 index by 293 bps, with 8 of the 11 sectors outperforming their respective sector benchmarks. Strong outperformance was achieved in Consumer Discretionary, Healthcare and Financials. In Healthcare, two holdings received take out offers – Celgene (CELG) and Allergan (AGN), while Danaher (DHR) benefited from its planned acquisition of the GE’s biopharmaceutical business in a $21.4 billion deal. Thermo Fisher Scientific (TMO) also posted strong performance, as the company continued to deliver better than expected top line growth and profits. TMO’s business of providing equipment and technology to help with life science research escaped the debate of medical cost in Washington, which created big headwinds for certain healthcare industries. In Discretionary, the outperformance is broad based though Target (TGT) is the indisputable winner delivering more than 110% in total returns. Despite its sometimes volatile price moves, Target’s operational results in the past 3 years since its turnaround plan took shape have been consistent. In 2019, Target solidified investors’ support that its turnaround is durable and its business model will thrive for the long run. Entering 2020, we very much appreciate Target CEO saying in one of the latest interviews that, “If there’s anything I worry about, it’s becoming complacent, feeling as if we have arrived and we are winning. Retail will always be a very, very competitive marketplace.” With the right strategy, right asset mix and a capable management team wary of complacency, we are confident Target’s best days are still ahead. In Financials, Ameriprise (AMP), Bank of America (BAC), and JP Morgan (JPM) were among the biggest winners as the robust US equity market returns boost those companies’ wealth advisory and asset management business. Further, BAC and JPM’s core banking business benefited from a healthy US economy, which continues to provide growth for lending while yielding low credit losses.

In 2019, most of the big 2018 “losers” in the Valuation 50 turned around, including Celgene (CELG), Nvidia (NVDA), Facebook (FB), LKQ Corp (LKQ), Tyson (TSN), Quanta Services (PWR), Ameriprise (AMP), Aptiv (APTV), and Cummins (CMI). Host Hotel & Resorts (HST) continued to underperform its REITs sector peers in the most part of the year as investors continued to fear a late hotel cycle and instead favor other REITs property types which specialize in datacenters, industry logistics, and residentials. HST is the only investment grade lodging REIT and one of the few undervalued names in the REITs sector in the SP500 when assessed from Applied Finance intrinsic value perspective.