“It would be one thing if the S&P 500 was priced for imperfection, but instead it is priced for perfection and that will likely lead to a painful recession.”
- David Rosenberg, Founder and CEO, Rosenberg Research
Happy Friday,
As predicted, in August the S&P 500 decreased 1.7% to 4,510, and the July S&P month-end close remains the high-water mark for 2023. Our year-end target for the S&P 500 remains at 4,000, implying a further 11% drop from where it currently trades.
On a YTD basis, there has been a clear mismatch between value investing and emotional/meme investing. Today, the forward (Q3 ’24) estimated PE ratio of the S&P 500 is now 20.6 and this is still far higher than the historical S&P 500 median of 14.9, which would logically point to a continued correction in the remaining second half of 2023 and early 2024. Especially considering the economic contraction that we project for the remainder of 2023 and early 2024.
This is a by-product of still-stubborn inflation that has forced the Federal Reserve to increase interest rates more than expected in 2023. In addition, we have now entered a longer “pause period” where we project that rates will stay higher for a longer period than first envisioned, before beginning a slow gradual reduction in 2024/2025.
We are taking our queue from the Bond market where rates have increased significantly in 2023 (short-duration 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 decades, thus we avoided the 20% meltdown in 2022. In August, the value of our public portfolio increased by almost 1.0% as we sought to reduce risk and wait for better entry points in the future. Overall, in the first 8 months of 2023, the value of our public portfolio increased by 6.0%, which lags the overall S&P gains for the same period, but we would rather hedge our portfolio now in advance of further market pullback that we expect in 2024.
We accomplished our YTD performance by acknowledging early on what the market had been signaling for months - that the 10-year “growth at any cost” movement would end - and we would be returning 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 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