Market Selloff
Dear Clients and Friends,
Thursday and Friday marked the 4th time in the last 50 years when the S&P 500 had a 2-day drop of over 10%. The other 3 times were October of 1987 (Market Crash), November of 2008 (Financial Crisis), and March 2020 (Covid). This one is different in that it is self-inflicted.
The Trump Administration is playing a high stakes game of poker with the global economy right now in order to balance trade flows and bring manufacturing jobs back to the US. Countries such as Vietnam and Cambodia have reportedly already made offers to reduce their tariffs on US imports in exchange for a reduction of the new tariffs we announced last week. However, China raised their tariffs on us.
The market hates uncertainty and nobody knows how far Trump is willing to take this. If countries reduce their tariffs on the US, and we materially reduce our just announced tariffs then that would be great for the US economy and our stock markets could be at all-time highs soon. If this is prolonged and other countries retaliate, we would enter a recession. The outcome is unpredictable. Everyday we wake up to a new headline. Unlike Covid or the Great Financial Crisis, this could all end today if Trump decides he has gained enough to declare victory.
Recall that we highlighted in past letters that the abnormally strong returns of the market the past few years couldn’t continue in perpetuity. As such, we are holding more in cash/treasury bills than normal in our strategies. Note that the GCI strategy has always operated with the philosophy that holding cash has option value, but that option value becomes expensive over a multiyear period. Therefore, the GCI strategy is 100% invested at all times. Also, as a reminder, we are invested in high quality companies that are leaders in their industry, have great management teams, and solid balance sheets. We do not own any apparel or auto companies such as Nike or GM which seem to be most at risk from tariffs should they become permanent. Some of the companies we own such as Amazon and a few industrial companies will be directly impacted by tariffs, but we think the issue is manageable for them.
We don’t know where these companies that we own will be trading tomorrow (no one does) but from here the long-term returns they will provide us with are very enticing. We have been through market downturns before and panics like this are the time to think about buying more, not selling. We don’t know where the bottom is, and we won’t know if the market bottomed until well after the fact. In 2009 the market bottomed on March 9th. It did not feel like the bottom at the time. In 2020 the market bottomed on March 23rd, but it wasn’t until November of 2020 that Pfizer announced successful results of a Phase 3 Trial for their Covid vaccine.
This is just to say that time in the market is more important than timing the market. 7 of the 10 best days for the market occurred within 15 of the 10 worse days. If you miss these days, it can have a material impact on your returns as seen in the chart below. For this reason we will typically never make reactionary wholesale changes, try to time the market, or resort to large scale liquidations.
We are invested in a number of great companies that we believe will create a lot of value for us over the long term. Clients should take comfort in the fact that each of these companies are more attractive today than they were at the beginning of the year.
For a great example of why this is true, consider Heico which is one of our largest holdings in our Focused Equity strategy. They sell aerospace parts and components to airlines. We bought Heico several months before Covid and before global travel fell off a cliff – creating one of the worse operating environments imaginable for Heico’s business. Even though our timing was as unlucky as it could have been, the investment still worked out well over time. Remember that when you own truly great businesses, time will always be your ally. You can read more about Heico below.
We don’t know what the market will do this week, but we have been through these situations before. We plan on opportunistically upgrading our portfolios and we will put our excess cash to work as opportunities present themselves. As always, we are grateful for your continued trust and partnership and we are always happy to answer any questions you may have so please feel free to email, call, or come into the office to see us.
Sincerely,
Jonathan, Mark, Gabe and David
This quarterly update is being furnished by Brasada Capital Management, LP (“Brasada”) on a confidential basis and is intended solely for the use of the person to whom it is provided. It may not be modified, reproduced or redistributed in whole or in part without the prior written consent of Brasada. This document does not constitute an offer, solicitation or recommendation to sell or an offer to buy any securities, investment products or investment advisory services or to participate in any trading strategy.
The net performance results are stated net of all management fees and expenses and are estimated and unaudited. These returns reflect the reinvestment of any dividends and interest and include returns on any uninvested cash. In addition to management fees, the managed accounts will also bear its share of expenses and fees charged by underlying investments. The fees deducted herein represent the highest fee incurred by any managed account during the relevant period. Past performance is no guarantee of future results. Certain market and economic events having a positive impact on performance may not repeat themselves. The actual performance results experienced by an investor may vary significantly from the results shown or contemplated for a number of reasons, including, without limitation, changes in economic and market conditions.
References to indices or benchmarks are for informational and general comparative purposes only. There are significant differences between such indices and the investment program of the managed accounts. The managed accounts do not necessarily invest in all or any significant portion of the securities, industries or strategies represented by such indices and performance calculation may not be entirely comparable. Indices are unmanaged and have no fees or expenses. An investment cannot be made directly in an index and such index may reinvest dividends and income. References to indices do not suggest that the managed accounts will, or is likely to achieve returns, volatility or other results similar to such indices. Accordingly, comparing results shown to those of an index or
benchmark are subject to inherent limitations and may be of limited use.
Certain information contained herein constitutes forward looking statements and projections that are based on the current beliefs and assumptions of Brasada and on information currently available that Brasada believes to be reasonable. However, such statements necessarily involve risks, uncertainties and assumptions, and prospective investors may not put undue reliance on any of these statements. Due to various risks and uncertainties, actual events or results or the actual performance of any entity or transaction may differ materially from those reflected or contemplated in such forward-looking statements. The information contained herein is believed to be reliable but no representation, warranty or undertaking, expressed or implied, is given to the accuracy or completeness of such information by Brasada.
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