Cutler Commentary

Market and Equity Income Commentary 1Q 2019

April 01, 2019

Cutler Investment Group First Quarter 2019 Review

Market Commentary

To borrow from Mark Twain, the first quarter of 2019 showed that the much-publicized death of the bull market has been greatly exaggerated- at least for now

Following a sharp downturn at the end of 2018, the first quarter saw broad strength in stocks, with major domestic and foreign stock indexes showing gains of 10+% for the period.  The selloff that had started in October and snowballed to almost a 20% drop in the S&P 500 by Christmas Eve seemed overdone, as we noted in our last review. The recovery resulted in the biggest first quarter for stocks in over 20 years!

The notable catalyst for the markets this past quarter was the Federal Reserve’s “about face” on the direction of interest rates. The markets balked at the Fed’s December increase, and the Fed got the message. As 2019 rolled around, Fed Chairman Jerome Powell changed his tone from hawkish to decidedly dovish. Central bankers around the globe are similarly biasing easing over inflationary concerns. While the reaction for stocks has been bullish, take note that central bankers are reacting to a weak global growth environment. As the stock market rallied on easy money, the yield curve inverted (longer rates yielding less than shorter rates) on downgraded growth. Quite a confusing message, to say the least.

In our previous Market Commentary, we relied on some key data points to watch for in 2019. While these are still suggesting an economic expansion, the data is no longer one-sided. Here is an update on those areas after the strong first quarter:
  • Valuations. Valuations have risen as stocks rallied, and the S&P 500 is now near 16.5x earnings (Source: JPMorgan) after getting down to 14.5x during the fourth quarter.
  • Economic growth. GDP measured in at 2.9% for the full year 2018 (Source: BEA), matching the highest annual rate since the Great Recession period.  Looking forward, expectations for 2019 are broadly in the 2.3%-2.4% range. 
  • Interest rates. The Federal Open Markets Committee raised rates to 2.5% on December 19th. Further rate increase projections have been tempered, and broad expectations are now for zero or one further rise this year, and some calls for a possible rate reduction if growth slows.
  • Currency. The more dovish stance by the Fed appears to be boosting other currencies relative to the USD.  This trend could continue, and if so, this would provide a boost to non-US positions.
Equity Income Review

The first quarter saw some relief on the policy front, as the Fed made dovish tones and the China trade situation seemed to get “maybe not better, but also not worse”.  Investors did some good old-fashioned bargain hunting, as many valuations dropped down well below long-term averages.

Gains were widespread, resulting in the S&P 500 Total Return index rising by over 13% for the quarter.  This rise, while impressive, still does not bring the index up to the high water mark it reached last October. Gains were led not just by Technology, but also Real Estate and Industrials. This divergence in leadership shows both the breadth of gains and some lack of conviction on whether to invest in Growth or Value.  The Russell 1000 Value TR index was up a strong 11.9%, which led Cutler’s Equity Income portfolio up 8.99% gross (8.79% net) for the quarter.

With oil up about 27% in Q1, it is not surprising that Schlumberger had an impressive 22% return. Industrials such as United Technologies (+21%) and Union Pacific (+21%) were also strong performers in the portfolio, as imminent recession fears fell by the wayside. Kroger (-10%) was the worst performer, largely on a poor earnings announcement, while Bristol-Myers Squibb (-7%) fell on the announced acquisition of Celgene. Qualcomm (-6%) continued to struggle, but was replaced during the quarter with PNC Financial Services Group. With a 10-year dividend requirement, large bank stocks have been limited in the portfolio for the past decade. However, the Great Recession is now 10-years behind us, and we looked to PNC as an interesting way to bolter the portfolio’s financial sector holdings. Buying at a time with such a flat yield curve seems most appropriate, as any steepening of the curve should benefit the traditional banking stocks.

Best Performing Securities Average Weight (%) Security Contribution to Portfolio Return (%)
Schlumberger Ltd. 0.70 0.14
United Technologies Corp. 2.48 0.53
Union Pacific Corp 2.18 0.45
Exxon Mobil Corp. 2.38 0.47
Marsh & McLennan Cos. Inc. 2.42 0.44
Worst Performing Securities Average Weight (%) Security Contribution to Portfolio Return (%)
The Kroger Co. 2.26 -0.24
Bristol-Myers Squibb Co. 2.52 -0.20
Qualcomm Inc. 1.51 -0.16
PNC Financial Services Grp. Inc. 0.84 -0.07
DowDuPont Inc. 2.54 0.01

The holdings identified do not represent all of the securities purchased, sold, or recommended for the adviser's clients. To obtain the calculation methodology or a list showing the contribution of each holding in the representative account to the overall account's performance during the measurement period, please call 1-800-2CUTLER or send a request to
Past performance is not indicative of future results. Net performance is pre-tax, net of advisory fees and transaction costs and includes the reinvestment of dividends. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment or strategy will be profitable or suitable for a particular investor's financial situation or risk tolerance. You cannot invest directly in an index. Asset allocation and portfolio diversification cannot assure or guarantee better performance and cannot eliminate the risk of investment losses. Source: Morningstar, Advent APX and Cutler Investment Group.
All opinions and data included in this commentary are as of April 1, 2019 and are subject to change.  The opinions and views expressed herein are of Cutler Investment Counsel, LLC and are not intended to be a forecast of future events, a guarantee of future results or investment advice. This report is provided for informational purposes only and should not be considered a recommendation or solicitation to purchase securities. This information should not be used as the sole basis to make any investment decision.  The statistics have been obtained from sources believed to be reliable, but the accuracy and completeness of this information cannot be guaranteed.  Neither Cutler Investment Counsel, LLC nor its information providers are responsible for any damages or losses arising from any use of this information.



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These blogs are provided for informational purposes only and represent Cutler Investment Group’s (“Cutler”) views as of the date of posting. Such views are subject to change at any point without notice. The information in the blogs should not be considered investment advice or a recommendation to buy or sell any types of securities.   Some of the information provided has been obtained from third party sources believed to be reliable but such information is not guaranteed.  Cutler has not taken into account the investment objectives, financial situation or particular needs of any individual investor. There is a risk of loss from an investment in securities, including the risk of loss of principal. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for a particular investor's financial situation or risk tolerance.  Any forward looking statements or forecasts are based on assumptions and actual results are expected to vary. No reliance should be placed on, and no guarantee should be assumed from, any such statements or forecasts when making any investment decision.


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