Penobscot Investment Management
Penobscot Investment Management

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First Quarter, FY2018 newsletter

Volatility was the main feature of the stock market in the quarter just ended, with the Standard and Poor’s 500 Index down -0.8 % since the beginning of 2018. After a stellar 2017 where the S&P Index rose 18.74%, it should come as no surprise that the market would become more volatile as share prices continued to rise early in the New Year, driven in large part by the tax cut passed by Congress in December and by solid economic growth and continued low inflation.

Despite the aforementioned economic winds blowing in investors’ favor, market jitters appeared with a vengeance in February and March, in contrast to the rather modest overall market decline for the quarter. Intra-day swings of several hundred points in the DJIA, while relatively insignificant from a percentage standpoint, were headline news. Reuters reported there were eight days in February “when the S&P 500 logged a single-day move of more than 1 percent, compared with eight days in all of 2017”. Given the generally strong earnings reports and positive economic news from corporate America, it is hard to find a fundamental reason for the increased volatility beyond the market needing to “take a breather” after a record number of years without a meaningful correction. When markets tumble and individual share prices follow suit, it is easy for investors to equate price swings with risk. Given what volatility may come in ensuing quarters, differentiating the two bears a brief discussion.

Volatility is a normal market occurrence. The market is rarely in stasis. Share prices are in constant motion, typically (although not always) by small increments. However, when we consider that publicly traded companies release their most closely watched news, i.e. quarterly earnings, four times annually, the changes in share prices outside of those earnings releases are often unrelated to company-specific events.

Succinctly stated, volatility represents a temporary change, up or down, in the value of an investor’s capital. According to Morningstar, the average stock on the New York Stock Exchange fluctuates nearly 40% between its high and low range in any one year. That is volatility of a magnitude likely not related to company fundamentals.

Risk, at least by our standard, is different. To our way of thinking risk is equated with poor management, declining financial health, lack of innovation, and other ills specific to an individual company that may lead to a permanent loss of capital directly related to company fundamentals.

At Penobscot we accept volatility as a fact of life for our clients’ portfolios. We believe our philosophy of investing in companies with a proven track record of consistently growing earnings and dividends provides the best opportunity for growth of capital and income over the long term. To borrow a saying from the world of sports, a good offense is the best defense against capital loss.

As always, we welcome your questions, comments or concerns.