To Our Shareholders:
CGM Mutual Fund decreased -2.4% during the second quarter of 2019 compared to a return of 4.3% for the Standard and Poor's 500 Index (S&P 500 Index) and 3.2% for the ICE BofAML U.S. Corporate, Government and Mortgage Index*. For the first six months of the year, CGM Mutual Fund returned 4.6%, the S&P 500 Index returned 18.5% and the ICE BofAML U.S. Corporate, Government and Mortgage Index returned 6.3%.
Building on a strong first quarter of the year, U.S. stocks continued to perform in April. Fears of a global recession diminished as the Chinese economy remained resilient despite trade tensions with the U.S. Increased factory production and overall industrial output along with surprisingly robust retail sales helped China maintain a 6.4% growth rate in the first quarter. On the other side of the globe, the European Central Bank's decision to institute a new monetary stimulus package increased optimism that the lagging European economy could rebound. In the U.S., job growth remained strong and the Labor Department reported in April that the U.S. economy added 196,000 jobs in March leaving the unemployment rate at a near all-time low of 3.8%. At the end of April, the Commerce Department reported that first quarter gross domestic product increased at a surprising annualized rate of 3.1%. This was the strongest first quarter growth in four years and it occurred despite softening domestic demand, a market correction leading into the new year and the month-long government shutdown from late December until the end of January. Inflation remained muted and the Federal Reserve Bank's preferred inflation gauge, the Price Index for Personal Consumption Expenditures, increased only 0.6% in the first quarter.
In May, trade tensions between the U.S. and China flared again and stocks in the U.S. and around the world suffered in response. Trade negotiations had been progressing well but unraveled when the U.S. accused Chinese negotiators of reneging on promises made. Trade talks ended with no deal and the U.S. raised existing tariffs on $200 billion of Chinese goods from 10% to 25% and began the process of instituting new penalties of 25% on an additional $300 billion of Chinese goods. China ultimately responded with the threat of increased tariffs on $60 billion of U.S. goods. In response, the S&P 500 Index dropped 2.4% on May 13. Signs of a slowing economy also increased in May. The Fed reported factory output dropped 0.5% in April and 1.9% for the first quarter and the Commerce Department announced durable goods orders fell 2.1% in April. Subdued economic data in the U.S. and around the world sent global bond yields to new lows. Major stock indexes around the world also dropped and U.S. equities endured their worst month of 2019.
U.S. stocks recovered quickly in June when Fed officials communicated they were closely monitoring trade issues and would consider cutting interest rates to offset any trade-related economic downturn. The news pushed the S&P 500 Index up 2.1% on June 4. Despite a relatively weak jobs report from the Labor Department that indicated the U.S. added only 75,000 jobs in May, stocks reacted favorably on the assumption the Fed would be more likely to loosen its monetary policy in response. Slowing global growth, trade tensions and a tight labor market all contributed to a continued sluggishness in U.S. manufacturing growth while European manufacturing activity contracted. But the U.S. service sector expanded briskly in May. The Institute for Supply Management reported that its non-manufacturing index increased to 56.9 in May from 55.5 in April. In mid-June, U.S. stocks reacted favorably to the European Central Bank's announcement of a new stimulus package to go into effect as soon as July and also to an agreement between President Trump and Chinese President Xi Jinping to meet and discuss trade issues at the G-20 summit. The Trump -Xi meeting put trade talks back on track for the moment and the U.S. agreed to hold off on additional tariffs on Chinese goods while China agreed to increase purchases of U.S. farm products. Positive trade developments and the Fed's apparent willingness to consider cutting interest rates helped the market recover from its poor May performance. The S&P 500 Index increased 6.9% in June and 17.4% year-to-date for its best first half performance since 1997.
The 10-year U.S. Treasury bond yielded 2.4% at the start of the quarter and fell to 2.0% at the end. Strong U.S. labor numbers and surprisingly strong Chinese economic data in early April pushed the yield as high as 2.6% on April 16. The yield moved lower through much of the rest of the quarter in response to trade tensions between Washington and Beijing and the possibility of a future interest rate cut by the Fed. The S&P 500 was priced at 21.1 times the trailing twelve month earnings at the end of the second quarter. Sustained moderate economic growth in the U.S. against a backdrop of a slowing global economy should continue to provide meaningful investment opportunities.
On June 30, 2019, CGM Mutual Fund was 26.3% invested in short-term U.S Treasury Notes. The three largest industry positions in the equity portion of the portfolio were in money center banks, aerospace/ defense and computer software and services. The Fund's three largest equity holdings were Banco Bradesco S.A. ADR (money center bank), Petroleo Brasileiro S.A. - Petrobras ADR (oil - independent production) and Itau Unibanco Holding S.A. ADR (money center bank).
David C. Fietze
July 2, 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.
This article first appeared on GuruFocus.