The fourth quarter was a very difficult time for equity markets across the globe, with December representing a large chunk of the quarter’s poor markets. US equity markets experienced the most turbulence since the Great Recession. The Dow Jones Industrial Average and the S&P 500 posted their worst Decembers since 1931, while the Nasdaq had its worst December ever.
December 2018 was the worst month the fund has ever experienced. CEA waited for a Santa Claus rally that didn’t start until after Christmas. We were heavily invested in names such as Amazon and Adobe, which were among some of the most sensitive names to the market’s December woes. We also held positions in the financial sector, retail, and the industrials, to remain diverse across the market, but the poor markets resulted in broad losses across the board.
In the final days of December, like many other funds, we began tax selling to limit the amount of taxes our investors will have to pay during a down year. Due to this, we cannot hold some of the names that got hit hardest in our portfolio until the holding period is over. Therefore, we can remain eligible for the tax selling benefits. Moreover, we maintained a 20% cash level going into the new year.
While selling stocks that have suffered losses at or near the bottom is never something we practice, we are managing the tax efficiency of CEA as a favorable investment. However, to capture the recovery we expect to continue through January, we invested in ETFs such as the IVV, DIA, and QQQ, in order to ride the market upwards until we can reinvest beginning February 1st.
With most of January completed, we are up around 8.5% net of fees and expenses for the month. We believe the recovery we have sustained is healthy and we are satisfied with the rate of recovery we have experienced thus far. Should our monthly return remain constant, it will be CEA’s best January on record. However, we cannot guarantee similar and/or future results. Additionally, to the dismay of our patience, markets typically take longer to recover than they do to fall.
From here, our outlook on the market is mainly positive, with a few reservations. The largest reservation we have regarding future market performance is the trade war and how it will impact earnings season. While we maintain the belief that the economy in Q4 was a favorable environment for our portfolio’s holdings to perform well regarding earnings, we still are cautious of the guidance we will receive from companies that begin reporting shortly. Due to this reservation, we are limiting the amount of options we sell, and are also maintaining a healthy cash level in our portfolio.
Although there are headwinds for the stock market and the economy, we do believe the bull market will continue in the foreseeable future. Given this, paired with a healthy earnings season, we will be fully reinvested to begin earning alpha once again.
Lastly, I would like to remind all of our investors that CEA does maintain a high-water mark in order to ensure that our investors pay minimal fees in times such as December.