“The weeds wither away in significance as the flowers bloom. Over time, it takes just a few winners to work wonders.”
- Warren Buffett, Co-Founder, Chairman, Berkshire Hathaway
Happy Monday,
As predicted, in September the S&P 500 decreased 4.9% to 4,288. As noted in our Aug 2023 Market Update, the Aug S&P month-end close of 4,589 remains the high-water mark for 2023. Our year-end target for the S&P 500 remains at 4,000, implying a further 6.7% drop from where it currently trades.
No matter how you slice it, one thing is clear – the market rally that began in October 2022 (and ended in August 2023) never had much in the way of fundamental underpinnings. Momentum, yes. Technical charts, yes. Sentiment and emotion, yes. Fundamentals and valuations, sorry, no. And this is why we never wavered in our position that fundamentals and valuations matter, despite all the external pressure to do so.
Everyone loves a bullish narrative, meanwhile, the Conference Board’s leading economic index has fallen for 17 consecutive months as economic uncertainty continues to grow. We are also taking our queue from the Bond market where rates have increased significantly in 2023 (short-duration T-Bills now yield ~5.6% with no state income tax burden). As fixed rates have moved up, astute investors have moved capital allocation in that direction to reduce equity market risk.
Here at PointFour Capital, we are adept at seeing the big picture since we have been at this for decades, thus we avoided the 20% meltdown in 2022. In September, the value of our public portfolio was flat as we sought to reduce risk and wait for better entry points in the future. Overall, in the first 9 months of 2023, the value of our public portfolio has increased by 6.0%, which lags the overall 11% S&P gains for the same period. Still, we would rather hedge our portfolio now in advance of further market pullback that we expect in 2023/2024.
We accomplished our YTD performance by acknowledging early on what the market had been signaling for months: the 10-year “growth at any cost” movement would end … and we would return to a more value-based investment thesis. That all happened in 2022 and we are investing accordingly in 2023 using long/short/macro bets to stay one step ahead of the market.
We are here for the long term and making a profit and avoiding the latest fads means something to us. Our perspective is that we will mind our own business in 2023/2024 and get ready to shift capital allocation as inflation gets closer to the Fed target rate of 2.0% and other opportunities present themselves.
We also continue building a strategy to take advantage of opportunities in the commercial office real estate market. The office meltdown has been occurring in slow motion as defaults have increased in 2023, especially in the “B” and “C” class office building sub-segment. Our strategy is to take advantage of the expected dislocation of prices in this office sub-market.
Remember that every significant market shift usually involves an over-correction, and we expect that this will happen here, so we will look to take advantage of the coming over-correction and set ourselves up for a great 2024 and beyond!
Thanks again for your consideration, ideas, and trust. Have a great 2023!
Best,
Vincent M. Oddo
Co-Founder & Managing Partner
PointFour Capital, LLC