To Our Shareholders:
CGM Mutual Fund decreased -4.1% during the third quarter of 2019 compared to a return of 1.7% for the Standard and Poor’s 500 Index (S&P 500 Index) and 2.4% for the ICE BofAML U.S. Corporate, Government and Mortgage Index*. For the first nine months of the year, CGM Mutual Fund returned 0.3%, the S&P 500 Index returned 20.6% and the ICE BofAML U.S. Corporate, Government and Mortgage Index returned 8.8%.
U.S. stocks continued to climb early in the third quarter in response to moderate domestic growth, tepid inflation and the Federal Reserve Board’s decision to ease its monetary policy. In testimony before Congress in early July, Fed Chairman Jerome Powell cited a weakening global economy and trade concerns. The Eurozone, which depends heavily on international trade, experienced a significant slowdown and both German and French government debt hit record lows with negative yields. In late July, the European Central Bank announced a restart of its economic stimulus plan with rate cuts and a resumption of its bond buying program. The U.S. economy remained resilient thanks in large part to the U.S. consumer. The Commerce Department reported June retail sales increased a seasonally adjusted 0.4% for a fourth consecutive month of rising retail sales and overall an increase in retail sales of 3.4% from the prior year. The Personal Consumption Expenditures Index, a broad measure of consumer price inflation and a component of the GDP, also rose a healthy 0.3% in June and the Conference Board’s Consumer Confidence Index climbed to its highest reading for the year in July. At month-end the Fed reduced interest rates by 0.25%, its first rate cut since 2008, though stocks retreated when the Fed did not clarify its immediate plans for further economic stimulus. Market weakness continued into August driven largely by the U.S.-China trade dispute. The Trump administration announced 10% tariffs scheduled to hit an additional $300 billion of Chinese imports on September 1. The news fanned fears of global economic slowdown, weighing on stocks, bond yields and commodity prices. Some new tariffs on consumer goods were subsequently suspended until December 15 to shield U.S. businesses and consumers during the holiday shopping season. China retaliated by allowing the yuan to drastically depreciate and, in response, the U.S. Treasury Department labeled China a currency manipulator. While this designation is largely symbolic, it ratcheted up trade tensions between the U.S. and China and the S&P 500 dropped 3% in response. On August 14, the S&P 500 fell an additional 2.9% on news of a contracting German economy and slowing Chinese industrial production, both byproducts of the trade dispute. The S&P 500 dropped an additional 2.6% on August 23 when China announced retaliatory tariffs on almost all remaining U.S. imports. By month-end, the market recovered some of its losses buoyed by a possible upcoming trade meeting between U.S. and Chinese officials.
Signs the global slowdown may be infecting the U.S. economy emerged in early September when the Institute for Supply Management released its manufacturing index which dropped from 51.2 in July to 49.1 in August. Any reading below 50 indicates a sector contraction and August marked the first dip below 50 in three years. Despite the fact that manufacturing makes up a small percentage of the overall U.S. economy, stocks retreated on the news. On September 6, the Labor Department reported moderate job growth continued with 130,000 new jobs added in August and this, coupled with the Institute for Supply Management’s report of continued expansion in the nonmanufacturing sector, managed to temper concerns of an impending U.S. recession. In mid-September, President Trump delayed a tariff increase on approximately $250 billion in Chinese goods and Beijing responded by exempting certain U.S. agricultural products from its retaliatory levies. However, the Personal Consumption Expenditures Index fell to a seasonally adjusted increase of only 0.1% in August. Yet, despite sporadic market turbulence, a charged and uncertain political climate and subdued economic data, the S&P 500 continued to maintain its best year-to-date performance since 1997.
The 10-year U.S. Treasury bond yielded 2.0% at the beginning of the third quarter, dropped to a low of 1.5% in late August and early September and finished the quarter at 1.7%. The yield fluctuated in response to changes in U.S.-China trade tensions and moved lower on indications of a global economic slowdown. The S&P 500 was priced at 21.8 times the trailing twelve month earnings at the end of the quarter. While stock valuations remain relatively high, we believe that continued modest U.S. economic growth will provide positive investment opportunities in an otherwise struggling global economy.
On September 30, 2019, CGM Mutual Fund was 26.0% invested in short-term U.S Treasury Notes. The three largest industry positions in the equity portion of the portfolio were in housing and building materials, aerospace and defense and money center banks. The Fund’s three largest equity holdings were Petroleo Brasileiro S.A. - Petrobras ADR (oil-independent production), Banco Bradesco S.A. ADR (money center bank) and Lockheed Martin Corporation (aerospace and defense).
David C. Fietze
October 1, 2019
*The index data referenced herein is the property of ICE Data Indices, LLC, its affiliates (“ICE Data”) and/or its Third Party Suppliers and has been licensed for use by Capital Growth Management Limited Partnership. ICE Data and its Third Party Suppliers accept no liability in connection with its use. See prospectus for a full copy of the Disclaimer.About the author:
Sydnee GatewoodI am the editorial director at GuruFocus. I have a BA in journalism and a MA in mass communications from Texas Tech University. I have lived in Texas most of my life, but also have roots in New Mexico and Colorado. Follow me on Twitter! @gurusydneerg