“Buy into weakness and sell into strength.”
- Jim Cramer, CNBC Host
Happy Monday,
At the start of August, the S&P 500 lost as much as 7.3% before recovering by the end of the month to post a 2.3% gain, ending at 5,648. This is the fourth straight winning month for the S&P 500, and it was based on a surge in consumer staples, real estate, and healthcare equities.
This market volatility reminds us that valuations matter and when they get too high a correction is in order. In August, while the S&P 500 gained 2.3%, our PointFour Capital public equity portfolio gained 4.4%.
We attribute our 91% gain over the S&P in August to our previous slow rotation into lower-valuation industrial / banking / energy stocks that will benefit from lower interest rates. Our 2024 S&P 500 year-end target 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 2024 and 2025 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 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 the day.
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. 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 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 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 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 Sept. 2024!
Best,
Vincent M. Oddo
Co-Founder & Managing Partner
PointFour Capital, LLC