Looking back, equity markets marched higher during the quarter, extending their gains as most indices have now risen over 10 percent through the first three quarters. Growth outpaced value and large caps rose over small caps. Global markets also fared well though Asian markets continued to feel pressure from potential trade impacts. Headline risk remains regarding potential tariffs and responses with China. Despite the constant rhetoric on trade, progress was made with Canada and an agreement to replace NAFTA appears likely between the U.S., Mexico and Canada. However, economic strength remains a tailwind domestically as investors continue to look for signs of cracks from the earlier trade actions. The Federal Reserve agreed that the economy is well-supported, choosing to raise the Federal Funds Rate during the quarter, and interest rates rose broadly. Volatility remained muted again during the quarter, though market participants remained cognizant for potential speedbumps that might appear.
Looking forward, earnings continue to be an important measure for the strength of the underlying economy, particularly here in the U.S. Concerns over when the next recession will happen remain given the duration of the current business cycle, while the most recent series of fiscal policies regarding trade and tariffs have further added to market worries. Equities have continued to look through the headline noise having rallied year-to-date, though mid-term elections could be a potential source of disruption. Interest rates have moved higher recently, with the Federal Reserve having hiked rates again at their most recent meeting. Another worry for the markets remains centered on the potential for the Fed to make a policy error and tighten conditions too much. Despite these fears, the strength in topline growth and cash flows have made valuations much more appealing than they were over the last few years. Continued focus by investors on companies’ ability to offset inflationary pressures and deploy their capital in high-returning areas will be a key differentiator for higher-quality companies. Similarly, volatility has remained stubbornly low and we remain vigiliant in assessing absolute risk and strive to protect client capital during increased periods of volatility.
Timothy Plan Large/Mid Cap Value Fund Q3 2018 Commentary
Within the S&P 500 Index, the Health Care, Industrials, and Information Technology sectors outperformed in the third quarter while the Materials, Energy, and Real Estate sectors underperformed.
The portfolio’s relative performance was aided by strong security selection in the Industrials and Energy sectors. PerkinElmer gained after posting strong double-digit organic revenue growth as a result of management’s strategy to reshape the portfolio towards higher growth areas. Hubbell gained on strong earnings as price increases began to offset expense pressures seen earlier in the year from higher input costs. FLIR Systems moved higher as the new CEO delivered on higher gross margins and earnings beat expectations. Union Pacific benefitted from solid underlying economic conditions and announced new longer-term operational improvements based on precision railroading. Cable One’s integration of NewWave provided some tailwinds and their strong growth in high speed data continued to move their revenue per user higher.
Unfavorable stock selection in Information Technology and an underweight in Health Care weighed on relative performance. Eagle Materials saw wet weather and more aggressive competition weigh on the results of their cement division. Mohawk Industries faced stiff cost headwinds which pressured margins, though management has implemented price increases to help offset. Public Storage moved lower on continued fears over incremental capacity coming online in the self-storage market in excess of current demand. Dentsply Sirona posted inline results but lowered guidance as inventory destocking for dental distributors is again a headwind. Lam Research shares fell on market concerns over the duration of the semiconductor cycle.