“The best chance to deploy capital is when things are going down.”
- Warren Buffett, Co-Founder, Chairman, Berkshire Hathaway
Happy Monday,
March was a solid correction month with the S&P 500 increasing 3.5% to 4,109.
This was a reaction to the declines we saw in February and a renewed sense that big-cap Tech stocks are once again a safe bet in these rocky times.
On a YTD basis, there has been a clear mismatch between value investing and emotional/meme investing. The trailing PE ratio of the S&P 500 is currently 21.97, and it is projected to increase to the mid-20s as earnings fall short of expectations later this year. This is far higher than the historical S&P 500 average of 14.92, which would logically point to a 20%+/- correction coming sometime in the second half of 2023.
This is a by-product of still-stubborn inflation that has driven the Federal Reserve to continue to increase interest rates more than expected in 2023. In addition, we now project a longer “pause period” where rates will stay higher for a longer period than first envisioned, before beginning a slow gradual reduction of rates in 2024/2025.
We are also taking our queue from the Bond market where rates have increased significantly in early 2023 (6-month T-Bills now yield 4.9% with no state income tax burden). As fixed rates go higher, more investors are moving capital allocation in that direction to reduce equity market risk.
Here at PointFour Capital, we are adept at seeing the big picture since we’ve been at this for many decades, thus we largely avoided the 20% meltdown in 2022. In March, the value of our public portfolio increased by nearly 1.0% as we sought to reduce risk and wait for better entry points in the future. Overall, in Q1 ’23 the value of our public portfolio increased by 2.3%, which lagged the overall S&P gains for the same period, but we would rather hedge our portfolio now in advance of the market pullback we expect later in 2023.
We accomplished our Q1 ’23 performance by acknowledging early on what the market had been signaling for many months. That is, the 10-year “growth at any cost” movement was about to end … and we would be ushering in a return to value-based investing. That all came to pass 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 at some point as inflation gets closer to the Fed target rate of 2.0% and other opportunities present themselves.
One anticipated upcoming opportunity is the commercial real estate market. We anticipate a significant meltdown in this market as defaults increase later this year, especially in the office building sub-segment. We are currently building a strategy to take advantage of this expected dislocation.
Remember that every significant market shift usually involves an over-correction, and we expect that this will happen here. We’ll look to take advantage of the coming over-correction and set ourselves up for a great 2023/2024 and beyond!
Thanks again for your consideration and ideas. Have a great 2023!
Best,
Vincent M. Oddo
Co-Founder & Managing Partner
PointFour Capital, LLC