To Our Shareholders:
CGM Mutual Fund increased 6.5% during the third quarter of 2018 compared to a return of 7.7% for the Standard and Poor’s 500 Index (S&P 500 Index) and 0.0% for the ICE BofAML U.S. Corporate, Government & Mortgage Index*. For the first nine months of the year, CGM Mutual Fund decreased -3.2% while the S&P 500 Index increased 10.6% and the ICE BofAML U.S. Corporate, Government & Mortgage Index decreased -1.6%.
International trade issues have been at the forefront of the news for much of the year and continued to impact markets around the world into the third quarter. In early July the U.S. imposed a new round of tariffs on $34 billion of Chinese goods and threatened additional charges in the months ahead. China retaliated with corresponding levies on U.S. goods and vowed to match all U.S. tariffs. Meanwhile, trade tensions between the U.S. and Europe subsided as the two economies agreed to refrain from new tariffs and to consider easing existing trade barriers. U.S. stocks reacted favorably to the economic truce between the U.S. and Europe and continued to rise through the quarter while markets around much of the rest of the world struggled. Inflationary pressures continued to build and the Labor Department reported its Consumer Price Index for June (released in July) reached its highest rate in more than six years, increasing 2.9% from the previous year. This followed the Labor Department’s June Producer Price Index report (also released in July) which registered a 3.4% increase for the year, the largest annual increase in prices for goods and services since November 2011. Late in July the Commerce Department reported Gross Domestic Product increased at a 4.2% annual rate in the second quarter reflecting healthy consumer spending, strong business investment and rising export activity that continues to fuel the U.S. economy.
By mid-August evidence of robust consumer spending was surfacing in solid quarterly retail sales reports. The Commerce Department confirmed the trend, reporting retail sales in July increased from the previous year by 6.4%. Consumer spending accounts for approximately two-thirds of U.S. economic output and rising employment and wages have contributed to the increase in spending. While wage growth has been modest throughout the economic expansion, in August the Labor Department reported the longest sustained stretch of increases in nine years, with growth at a 2.7% rate or better for three straight months. U.S. stocks briefly retreated on August 10 in response to a heightened economic crisis in Turkey that impacted markets around the world. A revised trade agreement between the U.S. and Mexico boosted stocks and the S&P 500 reached a new high on August 24, setting the record for the longest bull run ever. The Commerce Department’s Personal Consumption Expenditures Index (which is the Federal Reserve’s preferred inflation gauge) increased for the twelve months ended in July by 2.3%. This surpassed the Fed’s 2% inflation target and is the largest annualized increase in more than six years. U.S. consumer confidence continued to improve in August and the Conference Board’s Consumer Confidence Index rose to its highest level since October 2000.
In early September, the Labor Department reported the U.S. economy enjoyed a record 95th consecutive month of job growth in August with the addition of 201,000 jobs. The unemployment rate dropped to 3.9% and wages increased by 2.9% from a year earlier. This was the largest annualized wage increase since 2009 but also an indicator of increasing inflationary pressure. Inflation could also be seen in rising oil prices. In September, brent crude, the global benchmark for oil, reached its highest settlement since November 2014, closing at $81.20 a barrel. Oil prices steadily rose through September in response to a weakening dollar, impending U.S. sanctions that may curtail Iranian oil exports and the decision by OPEC and other major producers to refrain from increasing production. Rising inflation likely encouraged the Fed to raise short term interest rates by 0.25% on September 26 and to indicate that it anticipates gradually raising rates with one more increase in 2018 and additional increases through 2019. U.S. financial stocks dropped 1.3% on news of the rate increase. However overall, U.S. stocks enjoyed a strong third quarter with the Dow Jones Industrial Average, S&P 500 Index and NASDAQ all closing within 1% of their all-time highs.
The 10-year U.S. Treasury bond yielded 2.9% at the start of the quarter and 3.1% at the end. The yield moved slightly lower in August in response to uncertainty in emerging markets and trade tensions but gradually rose through the end of the quarter on mounting evidence of U.S. economic strength and improving conditions in the European economy. The S&P 500 Index was priced at 22.9 times the trailing twelve month earnings at the end of the third quarter. Stock valuations remain high, but we believe that positive corporate earnings and favorable economic data in the U.S. will continue to provide investment opportunities.
On September 30, 2018, CGM Mutual Fund was 26.2% invested in short-term U.S Treasury Notes. The three largest industry positions in the equity portion of the portfolio were in leisure, money center banks and oil - independent production. The Fund’s three largest equity holdings were Vale S.A. ADR (VALE, Financial) (metals and mining), Royal Caribbean Cruises Ltd. (RCL, Financial) (leisure) and Petroleo Brasileiro S.A. - Petrobras ADR (PBR, Financial) (oil-independent production).
David C. Fietze
President
October 1, 2018
*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 LP. ICE Data and its Third Party Suppliers accept no liability in connection with its use. See prospectus for a full copy of the Disclaimer.
