To Our Shareholders:
CGM Mutual Fund increased 1.8% during the fourth quarter of 2019, compared to the Standard and PoorÄs 500 Index (S&P 500 Index) which increased 9.1% and the ICE BofAML U.S. Corporate, Government and Mortgage Index* which returned 0.1% over the same period. For the twelve months ended December 31, 2019, CGM Mutual Fund increased 2.1% the S&P 500 Index increased 31.5% and the ICE BofAML U.S. Corporate, Government and Mortgage Index returned 9.0%.
The Year in Review and Economic Outlook
The longest bull market in history continued into its tenth year in 2019. After a market sell-off in late 2018, U.S. stocks surged early in the year despite the lengthiest U.S. government shutdown in history and concerns about global economic growth. In January, strong employment numbers and wage reports from the Labor Department as well as indications from the Federal Reserve that interest rates would remain steady propelled the market to its best monthly performance in three years. U.S. - China trade tensions affected the market throughout the year and in early February, stocks rose when the Trump administration agreed to hold off on a 25% increase in tariffs on $200 billion of Chinese goods. But by March, impatience with progress in trade negotiations depressed stock prices. Markets were also discouraged, at least initially, when the European Central Bank attempted to boost its sluggish economy by holding interest rates unchanged through the end of the year. Nevertheless, the market enjoyed a strong finish to the first quarter after the Labor Department reported that worker productivity, which directly impacts wages and output, jumped 1.9% in the fourth quarter of 2018.
In April we learned that economic growth in the first quarter was the strongest in four years with gross domestic product rising at a vigorous 3.1% annualized rate. Concerns about a global recession faded as China reported surprisingly strong retail sales numbers and an overall 6.4% growth rate for its first quarter despite ongoing trade tensions with the U.S. Domestic economic indicators remained largely positive through the rest of the first half of the year though tempered global growth, recurring trade tensions and a tightening labor market weighed on U.S. manufacturing growth and also led to contraction in European manufacturing. However, the Institute for Supply ManagementÄs monthly nonmanufacturing index indicated consistent expansion in the U.S. service sector in 2019 which offset the slowdown in manufacturing. Near the end of the second quarter, a meeting between President Trump and Chinese President Xi Jinping at the G-20 summit in Tokyo led to incremental progress in trade negotiations which helped boost stocks to their best mid-year returns in over two decades.
In the first of three rate cuts in 2019 (and the first reduction since 2008) the Fed reduced interest rates 0.25% in July. However, at the time, the Fed remained silent about future plans for economic stimulus and the market dropped on the rate cut news. In early August the Trump administration announced additional tariffs on Chinese goods which triggered new fears of a global economic slowdown and battered stock and commodity prices and bond yields. China subsequently reacted by allowing a swift and sizable depreciation of the yuan and threatened retaliatory tariffs on almost all remaining U.S. imports. The market declined in response to the heightening trade tensions along with news of slackening Chinese industrial production and contraction in the German economy. But again, trade tensions dissipated in late August and in midSeptember, the Fed announced a second 0.25% rate cut. So, despite headwinds and conflicting indicators, markets closed in positive territory and the U.S. economy persevered with moderate gross domestic product growth of 2.1% in the third quarter.
U.S. economic growth continues to outperform global economies. Steady job growth, rising wages and solid consumer spending propelled the U.S. economy through year-end. In early December the unemployment rate dropped to a historically low 3.5% and the Labor Department reported the 110th consecutive month of job gains as employers added 266,000 new jobs. Wages were up 3.1% from a year earlier and continue to outpace inflation. Any immediate concerns about a recession have diminished. After a third rate cut in October to Åprovide some insurance against ongoing risks,Ç the Fed held off on an additional rate reduction in December citing a favorable overall outlook for the economy. Corporate earnings have been surprisingly strong, boosting stock prices. U.S. - China trade tensions have eased as the countries agreed in principle to a Åphase oneÇ limited trade agreement that curtails U.S. tariffs on Chinese goods and includes commitments by China to purchase $50 billion of U.S. agricultural products along with energy and other goods. Additionally, a new trade pact with Canada and Mexico is nearly complete. Improved trade relations and sustained growth in the U.S. economy ultimately pushed the S&P 500 to its best performance since 2013.
Portfolio Strategy
CGM Mutual Fund was fully invested during 2019 in anticipation of continued growth in the American and global economies. The largest concentrations were in large Brazilian banks and U.S. defense contractors.
The Fund had almost no participation in information technology stocks which led the markets and appreciated 48% in 2019. This significantly limited the FundÄs performance in a rising market. Individual gains and losses in portfolio securities were largely offsetting.
On December 31, 2019, CGM Mutual Fund was 26.0% invested in short-term U.S. Treasury securities. The equity portion of the portfolio was 14.4% invested in retail, 13.8% invested in electronic components and 8.1% invested in money center banks. The FundÄs three largest equity holdings were Petroleo Brasileiro S.A. - Petrobras ADR (PBR.A, Financial) (oil - independent production), Thor Industries, Inc. (THO, Financial) (home products) and Skyworks Solutions, Inc. (SWKS, Financial) (electronic components).
David C. Fietze
President
G. Kenneth Heebner
Portfolio Manager
January 2, 2020
*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.
