Big River Report
BIG RIVER CAPITAL MANAGEMENT

Phone: 601.259.3731

Email: wtr3@bigriverfunds.com


RiverView Q1 2018


The estimated net of fee results for Big River portfolios invested throughout the full quarter ranged from -.95 basis points to +1.68%.

The estimated net of fee result for the actively managed, concentrated strategy was +1.68%.

During the first quarter of 2018, the US equity benchmarks exhibited many of the classic signs of a market top.

Whether or not these benchmarks will hold at a correction (down 10%, which was reached during the quarter) or become a bear market (down 20% or greater) depends a great deal on how the Federal Reserve manages interest rates and interest rate expectations going forward.

US history suggests that unwinding accommodative monetary policy is difficult and most often the result is a bear market for stocks.  
 
Below are the 2018 forecasts for the US economy as outlined at the Federal Reserve’s March meeting:

GDP growth 2.7%; CPI inflation 1.9%; year end unemployment rate 3.8%; year end Fed Funds 2.0% - 2.25%; year end prime rate 5.25%.

According the Fed’s longer run forecast, the unemployment rate is expected to run below target with inflation moving above target. 

These developments, together with the tax cuts and spending initiatives enacted by Congress, have the Fed concerned about inflation.
  
Under the new leadership of Jerome Powell, the Fed maneuvered to prevent excessive inflation by raising interest rates at the March meeting and preparing the markets for a faster rate of interest rate ascent going forward.

The bull case (US stocks rising sustainably from present levels) is that higher GDP growth without excessive inflation and a growing labor supply (increasing labor force participation) will be beneficial for stocks. 

Since we don’t know which outcome will unfold, our aim is to interpret the data as best we can and position the portfolio toward our view of the highest quality, value investments available.

Either way, whether we remain in a bull market or we have entered a bear market, many stocks are now considerably less expensive than they were at the end of January. 

I believe the current prices represent an opportunity for long term investors. 

BIG RIVER CAPITAL MANAGEMENT, LLC
MONEY MANAGEMENT
CEO: Bill Robertson
Email: wtr3@bigriverfunds.com
Fax: 601.487.6365
Phone: 601.259.3731

Client performance for 2017, net of fees, ranged from +16.68% through +21.25%. This range represents clients who were invested throughout the full year.

During December, the Federal Reserve raised the benchmark Fed Funds rate to between 1.25-1.50%. The prime lending rate is now 4.5%. 

Forecast for 2018 call for three interest rate increases taking the Fed Funds rate to between 2.00-2.25% and the prime lending rate to 5.25%.

The most recent Federal Reserve forecast for 2018 is as follows:

GDP: +2.5%

PCE Inflation: +1.9%

Unemployment: 3.9%

Fed Funds Rate: 2.1%

The bull case for US stocks (stocks will advance without a 20% or greater decline) is that the market is on pace for the longest bull run in history, potentially reaching nine years old in 2018.

The recently passed US tax cuts are expected to add economic growth to a US economy that is already gaining momentum.

The bear case for US stocks (a bear market is defined by a 20% drop in price) is that valuations are historically high, and the good news is already priced in. 

During 2018 the US Treasury is expected to issue roughly $1 trillion in securities to fund the deficit, and the Federal Reserve will reduce it's securities holdings around $230 billion. The result will be a roughly $1.25 trillion increase in supply of treasury related securities.

These market dynamics: high stock market valuations, rising interest rates and an increasing supply of debt securities represent potential catalysts for an inevitable bear market in US stocks.

Alternatively, US stocks could tread water throughout 2018.

Our aim is to build wealth, not time the stock market.

At some point in time, the bull market will end and there will be a bear market. Whatever the new year brings, if we are adequately prepared, there will be opportunities to build wealth.