“The investment ideas that worked well during the last 10 years of very low interest rates are not going to work well over the next 10 years.”
- Afsaneh Beschloss, Founder & CEO of RockCreek Group, the largest woman-owned investment firm in the U.S.
Happy Monday,
June was a significant month with the S&P 500 increasing 6.5% to 4,450. This may end up being very close to the high-water mark for the year.
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 now 25.78, and it is projected to increase even higher as the earnings recession takes hold in H2 2023. This is far higher than the historical S&P 500 average of 14.9, 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 forced 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 2023 (6-month T-Bills now yield 5.5%+ 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 many decades, thus we largely avoided the 20% meltdown in 2022. In June, 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 the first 6 months of 2023 the value of our public portfolio increased by 4.4%, 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 YTD performance by acknowledging early on what the market had been signaling for many months. That is, the 10-year “growth at any cost” movement would end and we would be returning to a more value-based investment thesis. 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.
We continue to monitor opportunities in the commercial real estate market as we anticipate a significant meltdown in this market as defaults increase in 2023 / 2024, especially in the “B” and “C” class office building sub-segment. We have built 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, so we will 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