“After some mistakes, I learned to go into business only with people whom I like, trust, and admire. We have never succeeded in making a good deal with a bad person.”
- Warren Buffett, co-founder, Chair and CEO of Berkshire Hathaway
Happy Monday,
The S&P 500 ended May 2024 at 5,277, gaining 4.8%, which offset the (4.2%) decline in April. On a YTD basis, the S&P 500 is now up 11.2%, which is a good start to the year. Meanwhile, at PointFour Capital, our public equity portfolio gained 12.1% on a YTD basis.
We attribute our positive performance, compared to the S&P, to our artificial intelligence (AI) related stocks and our continued rotation into lower valuation industrial / banking / energy stocks. In addition, we added a slightly oversized position in gold (GLD) to create a risk-reducing hedge. Our 2024 year-end target for the S&P 500 is still 5,200–5,400, which implies a continued rotation into lower-valuation stocks.
In many ways, it has been a smooth and positive start to the year for financial markets. However, as we reflect on the market and economic landscape, it has become apparent that several undercurrents, both positive and negative, are becoming more pronounced. We will discuss the three most important developments that could limit or extend this current economic cycle.
We begin with the undercurrent most likely to cut this cycle short – economic bifurcation. While overall growth has been strong, it belies offsetting extremes beneath the surface. Growth is accelerating in some sectors, such as those fueled by AI-related enthusiasm; meanwhile, many interest-rate-sensitive sectors and consumers are feeling pressure. This trend has created investment opportunities that we did not anticipate at the beginning of the year, such as TJX, an off-price retailer that had a blow-out Q1, and their projections for the full year are very strong. We appear to have reached an inflection point for a sizable number of consumers focused on inflation as a top concern.
The second undercurrent is that the U.S. economy is not solely demand-driven, and important supply-side gains have developed since the end of the pandemic. In many cases, we have seen a reversion to more normal supply conditions, and in others, a meaningful improvement from pre-pandemic norms. We view these dynamics as supportive of a continued expansion in the economy, and they are another reason the Fed can ease rates even as overall economic growth levels remain strong.
The third undercurrent is China. We have begun to realize that China’s economic troubles are not dragging down the world with it; rather their weakness is creating tailwinds for certain countries and markets across the globe. This is creating investment opportunities in many emerging market countries such as: Mexico, Vietnam, India, Japan, and South Korea. We have already added investment in Japan and look for us to add additional investments in some of the other countries listed above in the coming months.
Here at PointFour Capital, we are adept at seeing the big world-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 to protect against the current market rotation.
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 recognize the once-in-a-lifetime investment thesis in AI, and identified several main participants – NVIDIA, Microsoft, Google, Meta, and Amazon.
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 take advantage of opportunities in the commercial real estate 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 current dislocation of prices in this sub-segment and buy office/industrial buildings in growth markets, like Atlanta, 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 we look to take advantage of short-term corrections and set ourselves up for a great 2024 and beyond!
Thanks again for your consideration, ideas, and trust. Have a great June 2024!
Best,
Vincent M. Oddo
Co-Founder & Managing Partner
PointFour Capital, LLC