“Know what you own, and know why you own it.”
- Peter Lynch, former manager of the Fidelity Magellan Fund
Happy Thursday,
July certainly turned out to be a tale of two cities! On the one hand, there was bullish momentum in the first half of the month, but in the second half, the market reminded us that valuations matter and when they get too high a correction is in order. In July, the S&P 500 gained 0.9%, meanwhile, at PointFour Capital, our public equity portfolio gained 1.4%.
We attribute our 55% gain over the S&P in July to our slow rotation earlier in 2024 into lower-valuation industrial / banking / energy stocks that will benefit from lower interest rates. Our 2024 year-end target for the S&P 500 remains at 5,500–5,700, which implies a continued slow rotation into lower-valuation stocks. The fact of the matter is that the market now recognizes that interest rates will soon begin moving lower in Q3/Q4 2024 and that will help lift interest-rate sensitive stocks.
As we pointed out last month, behind a strong and resilient 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 mid-cycle expansion. Fundamental momentum, in the form of EPS expectations, drives the short-term trend. Valuation, which matters in the long term but has a negligible effect in the short term, tells you how far you could fall. As long as 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 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 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 recognize the once-in-a-lifetime investment thesis in AI, and identified several main participants – NVIDIA, Apple, Broadcom, 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 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 we look to take advantage of short-term corrections and continue having a great 2024 and beyond!
Thanks again for your consideration, ideas, and trust. Have a great August 2024!
Best,
Vincent M. Oddo
Co-Founder & Managing Partner
PointFour Capital, LLC