What a difference a month makes. While December found itself in the conversation for the “worst month ever”, January represented the polar opposite with stocks rallying in an aggressive and unrelenting fashion throughout the month. Amusingly, the violent swings in equities can best be explained by changes in sentiment rather than changes in any particular fundamentals as we believe investors have chosen to swing back and forth between optimism, pessimism, back to optimism again despite no substantive change in the backdrop. Of course there have been some changes to economic numbers but nothing that warrants a 15% round trip in stocks. Traders’ obsession with the language used by the Federal Reserve of the U.S. has reached a fever pitch with the new interpretation being that Powell the uber-dove will keep the cheap money spigots open forever while signaling a potential reduction of the balance sheet normalization program the Fed had undertaken.
Well, the dust has settled and Forge First has concluded a great year with each of our funds providing solid net returns to our investors. The S&P 500 on the other hand suffered one of its worst months ever, finishing down 9% for December 2018. This of course could have been much worse if not for the heroic rally that brought stocks back from their lows on Christmas Eve, at which point US stocks were down 14.82% on the month. By comparison Canadian stocks fell a paltry 5.75% over the month (9.5% down at their worst, also Christmas Eve). This sort of startling volatility is the result of a great divergence in opinions within the financial arena at a time when liquidity has become increasingly scarce. The disagreement is palpable and characterized by the violent moves both up and down.
Is this nothing more than a harsh correction or were the September highs the end of the bull market? And yes while it is worth pointing out that US stocks did briefly hit the definition of a bear market last month, declining 20% from their highs, the question we’re asking, and aim to decipher, is whether there’s a further 20% downdraft or is the next move, be it up or down, more modest in nature.
November yielded another difficult month to read for equity investors. While the performance of various indices finished in positive territory, we have been hard pressed to find anyone actually comforted by that fact. The month was full of volatility, troubling market and economic signals and ominous political developments. Perhaps the slight positive performance of both the S&P 500 and the TSX Composite were cold comfort to equity investors because of the sheer magnitude of the drop in October, making the bounce seem paltry. For us at Forge First, the month brought a slight decline with negative performance driven largely by the reasonably low cyclical exposure that we do have, namely in energy and industrials. In particular two of our highest conviction long positions, Parex Resources Inc. (PXT.CA) and Parkland Fuel Corp (PKI.CA) were a disproportionate percentage of the decline, something we truly do not believe is going to be repeated. Positive contributions came from our consumer focused companies, real estate exposure, and market protection option strategies. Unsurprisingly, TSX positive performance was driven by the most defensive sectors with consumer staples, utilities and telco’s leading the positive performance.
Four months shy of its 10th birthday, October marked this equity bull market's 2nd 10% drawdown of 2018. Unless an investor was in cash, held a short book or perhaps a fund whose underlying assets aren't marked to market on a monthly basis, it was a tough few weeks. Each of the S&P 500 & the TSX delivered total return losses of greater than 6% for the month, leaving Canadian equities red year to date. The Class F Lead Series of our Forge First Multi Strategy LP declined 1.11% net of fees while our Forge First Long Short LP Class F Lead Series fell 2.19% after fees. However, as shown in the table below, each of our funds remains solidly positive year to date and for the rolling 12 months.