Dear Friends/Clients;

The most recent quarter highlighted once again how uncertain the investment markets can be in the short-term. While the final Q1 market returns were positive, the day-to-day was a harrowing rollercoaster ride. In the end, the broad U.S. stock market recorded slightly positive performance while international developed stocks had slightly negative performance. Emerging market stocks saw continued strength for the first time since the second quarter of 2014. Longer term U.S. and global bonds were the beneficiaries of extremely accommodative monetary policy by the world’s Central Banks and posted positive total returns as well. Real estate continued to march forward, most likely fueled by the search for yield since it generally can’t be found in investment grade bonds.

Unfortunately, the wrap up doesn’t begin to represent the volatility that occurred during the quarter. The S&P fell 1.4% on the first trading day of the year, had its worst “first week of the year” on record, and the worst January since 2009. On February 11th, the global stock market reached bear market territory, down roughly 20% from the highs of last May. Many international markets were well into bear market territory. Headlines focused on slowing profits, the Fed raising rates, further drops in oil prices and a faltering Chinese economy.

Then, stocks made a 180-degree turn moving up sharply for the second half of the quarter. Central banks around the globe eased monetary policies and economic numbers in the U.S. came in better than expected. Oil companies and major energy exporters indicated they were going to slow down production helping lift oil and energy stock prices. We are hopeful this turn will evolve into a sustainable recovery in global markets.

As we mentioned in our January commentary, the past two years have been a significant challenge for investors as well as advisors. In general, there have been times when diversification wasn’t as good of a friend as we would have liked for it to be. On other occasions, it served its purpose. Also, due to the level of macro uncertainty and, in some cases high valuations, we felt the need to overweight cash in most portfolios. This tactic has had mixed results. The large U.S. companies have had declines but have never broken, so being conservative has not paid off in this instance. An overweight toward cash has helped reduce losses in several other areas of the market. Small U.S. companies and international developed markets are both still lower now than they’ve been since late 2013, and international emerging markets are lower than they’ve been since mid-2009. Still, a selloff in the U.S. of the size we were concerned about has not transpired and thus, neither has the buying opportunity we’d hoped for.

While conditions are subject to change, at present, many indicators we follow are becoming encouraging (this may sound odd given the amount of negative headlines we read daily). With this in mind, we have been reducing the cash positions since quarter’s end. Our goal is to move closer to full investment without paying too much for the investments we buy. We are making investments both methodically and opportunistically, phasing in some positions while jumping into others. We do not know the declines are over and expect to see further volatility. Even so, large U.S. companies are roughly where they have been the past two years, and all international markets are much lower than their average price of the last two years. So you have and will see more increased activity in your accounts.

Through our investments in software, we are now able to implement our investment strategy across multiple accounts or combine accounts into one strategy. This may mean a slight shift in the look of your quarterly statement as we attempt to provide information in a way that communicates the approach we are taking with your investment portfolio as a whole.

To briefly reiterate our over-arching philosophy to investment management, we employ a multi-asset/multi- strategy approach to building highly diversified portfolios. Regarding the strategic/tactical timing of investments, we endeavor to keep some investments always in the market (Market Capture Strategy). We will have some investments where we employ “circuit breakers”. With this portion, we are willing to increase cash during times of distress or over-valuation caused by investor euphoria (Risk Managed Strategy). As part of our core, we also add diversification by real estate and commodities and several “absolute return” investments that use trend following and hedging to generate return while minimizing loss.  We further customize accounts by blending in additional strategies which are more focused in nature. A brief description of each is below.

Core

Focus

Investing is an uncertain exercise. For us to take intelligent risks, we must have a reasonable degree of confidence that these risks will provide an appropriate return over time.  We are keenly aware of our responsibility to deliver this trust, and we continue to take all reasonable steps to give you the highest probability of success. Inevitably, we will make both right and wrong decisions. Given that fact, one of our foundational tenets is never to allow any one decision to impact meaningfully your long-term success.  We will continue to subscribe to a sound philosophy and a consistent decision-making process while at the same time adjusting for the impact of positive and negative positioning and new risks or opportunities in the marketplace.

As always, we are grateful for your trust and confidence and welcome deeper discussion of the current environment, investment strategy, or other matters. We will be looking forward to meeting or speaking by phone soon. Please don’t hesitate to call us earlier with questions or concerns.

 

Your CCA Investment Team