Morgan Creek Capital Management Q1 2017 Letter

At the end of 2015 we created our #2000.2.0 thesis (now renamed #2000Redux because the dots mess up the hashtag in Twitter), which posited that the period from 2016 to 2018 would resemble the period of 2000 to 2002 in the U.S. equity markets. In writing the letter last quarter, we looked back and compared the path of 2000 to the path of 2016 and found that for the first ten months of the year there were some striking similarities.

We wrote about the specifics of the paths as follows, “In 2000, the S&P 500 was down hard in the first six weeks of the year, falling (9%) by midFebruary, while in 2016 the drop was (11%). In 2000, the market rallied halfway back in March and was mostly flat during the summer leaving the index down (3%) coming into Election season, while in 2016 the markets rallied all the way back by April, suffered a setback during Brexit, but rallied back to up 2% on the eve of the election.”

The similarities ended there, however, as in 2000 the markets sold off sharply after the election to finish down (9%), but after the surprise victory by Mr. Trump, the narrative quickly shifted from Doomsday to Boomsday and the S&P 500 surged to finish the year up 12%. Given the dramatic divergence, we went on to write, “A legitimate question to ask is does the positive market reaction post-election negate the #2000.2.0 thesis? For now, we will say “Not yet” as there are still signs that economic growth is slowing (Q4 GDP just disappointed) and should there be a 2017 Recession (like 2001) equities could catch down in a hurry.” In 2001, it became apparent that the economy was slowing quickly as Q1 GDP came in down (1.3%), but there was not much talk about recession because Q4 had been strong, up 2.3%, and the conventional wisdom at the time was that you needed two negative quarters in a row to have a recession.

Curiously, that view was disproved later in the year as Q2 GDP was up 2.1% and Q3 was down (1.1%) and NBER finally called the recession in November saying it started in March (ironically, they later said it ended in November). Q1 GDP in 2017 was very disappointing at only 0.7% (subject to two more revisions), but it wasn't negative and we will have to see how the balance of the year unfolds on the growth front.

We concluded this section last quarter by introducing a new idea that perhaps the U.S. election surprise had stimulated a new path for the markets, saying, “All of that notwithstanding, there is an alternative scenario that actually could be developing in real time that we will discuss in the 10 Surprises section below, in that perhaps Mr. Trump turns out to be the second coming of Herbert Hoover and 2017 will look more like 1929 than 2001 and #2000.2.0 gets replaced with #WelcomeToHooverville,” and we provided color on how that sequence of events might unfold.

So let’s dive in to the Q1 results and see if we look more like 2001, 1929 or perhaps another path altogether.

The full letter can be downloaded here