“The risks to achieving our employment and inflation goals are roughly in balance, so we are attentive to both sides of our dual mandate.”
- Jerome Powell, Federal Reserve Chairman
Happy Tuesday,
In September, the S&P 500 gained 2.0%, ending at 5,762. This is the fifth straight winning month for the S&P 500, and this gain was primarily due to the Federal Reserve’s decision earlier this month to lower interest rates by 50 basis points. Most market sectors grew in September, except large-cap tech stocks which had dominated growth earlier this year. This “growth rotation” into other market sectors is a good sign for Q4 and 2025.
September also brought further confirmation that inflation remained on the right path. The 10-year Treasury yield has moved lower which has already helped decrease mortgage interest rates.
This market rotation reminds us that valuations matter and when they get too high a correction is in order. In September, while the S&P 500 gained 2.0%, the PointFour Capital public equity portfolio gained 2.1%.
We attribute our small gain over the S&P in Sept. to our early rotation into lower valuation industrial / banking / interest-rate sensitive stocks that are benefiting from lower interest rates. Our 2024 S&P 500 year-end target is now 5,600–5,900, which implies a continued rotation into lower valuation stocks in Q4.
As we pointed out earlier in Q3, behind a strong single U.S. economy, there are really two broad truths: One where those at the top spend like there is no tomorrow, and one where those at the bottom struggle to make it through today.
These conditions are characteristics of a midcycle expansion. Momentum, in the form of EPS expectations, drives the short-term trend. Valuation, which matters in the long term but has negligible effect in the short term, tells you how far you could fall. If momentum is positive, U.S. stocks can continue to rise, but a rotation to lower valuation stocks will occur at the same time.
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 and beat the S&P 500 two-year (2022 & 2023) performance by 14%. In 2024, we continue to beat the S&P 500 performance while at the same time reducing overall risk by hedging our portfolio as the slow rotation to lower valuation stocks continues.
We achieved our 2022 - 2024 performance by predicting early on that we would eventually return to a more value-based investment thesis. In addition, we astutely recognized the once-in-a-lifetime investment thesis in AI, and identified some of the main participants – NVIDIA, Apple, Broadcom, and Microsoft.
We are here for the long-term and making a profit and avoiding the latest fads means something to us. We do not see AI as a fad of any kind, instead, we see it as a fundamental technology shift that will alter the world as we know it over the next decade.
In addition, we also continue to look at opportunities in the commercial real estate/REIT market. The meltdown in this segment has been occurring in slow motion as defaults increase, especially in the “B” and “C” class office sub-segment. Our strategy is to take advantage of the dislocation of prices today in growth markets in the U.S. where we believe there will be a substantial inventory shortage in the next 5-10 years.
Remember that every significant market shift usually involves an “over-correction,” so look to take advantage of short-term corrections.
Thanks again for your consideration, ideas, and trust. Have a great Oct. 2024!
Best,
Vincent M. Oddo
Co-Founder & Managing Partner
PointFour Capital, LLC