Investor Insights

April 2024 Investor Report        

Published: June 4, 2024Updated: June 4, 2024

The first month of the second quarter was broadly weak. A late rally helped lessen the blow, but equity prices were under pressure all month. A mix of lower-than-expected domestic economic growth, hotter-than-expected inflation data, and a hawkish tone from the Federal Reserve lowered all three major domestic indices. The Dow Jones Industrial Average and the Nasdaq Composite also showed losses of -5.0% and -4.41%, respectively. The “winner” of the domestic indices was the S&P 500, which lost the least, falling -4.16%. The Bloomberg U.S. Corporate Bond Index, an index tracking investment grade, fixed-rate corporate bonds, fell -2.52%. We are delighted to report that we realized broad outperformance compared to the benchmarks during the month. Our measured mix of equities, bonds, and preferred stock helped reduce downside volatility while realizing some small gains in some fixed-income positions. 

In an April appearance, Federal Reserve Chairman Jerome Powell signaled that policymakers would need to wait longer than anticipated to cut interest rates after three straight months of inflation, exceeding analyst expectations. Core CPI (Consumer Price Index) increased by 3.8% compared to March 2023. Economists had expected the metric to fall. Shelter-related costs continue to be one of the main drivers for inflation, along with auto insurance premiums and rising commodity prices. Consensus had long expected that rent inflation components would move lower by now. In fairness, data from real estate company Zillow has flagged falling rent rates for the better part of the last three quarters. Still, a housing shortage continues to stymie a material move lower in rent-related inflation. We should emphasize that inflation should still head lower over the year. We wrote to you a few months ago, flagging our concerns that inflation could stay high or possibly accelerate into year’s end, but several of our inflation-leading economic indicators have fallen over the last 60 days. Overall, while inflation should continue to head lower over the coming quarters, the prospects of the Federal Reserve getting to its long-term inflation target of 2% seems unrealistic for the foreseeable future. It would be fair to question why the Federal Reserve was so confident in making its dovish pivot last fall, which acted as the primary catalyst for driving the markets higher when monetary policy did not tame inflation. We could be in the early innings of a hawkish pivot to unwind a lot with the Federal Reserve created in October.

During our quarterly video call with clients a few weeks ago, we mentioned how we thought we could have a weak April and positive performance from markets over the next 5 to 6 months leading up to the election. We believe that markets over the next few months should have a positive experience because financial conditions are still historically very loose and investor sentiment is broadly positive. The Bloomberg United States Financial Conditions Index ended April with a score of 1.02. An index score over one signals very loose conditions. So far this year, we are on a historic pace for new bond issuance by public companies, and the spread above risk-free rates is very narrow. Capital markets are not seeing much of any stress. Secondarily, investor sentiment is still overly positive. We continue to see new capital flow into the equity market on a week-by-week basis. These two variables are potent indicators for near-term performance in the stock market.

Please see the following updates on existing positions held at the firm:

Short-Dated, Investment-Grade Corporate Bonds- Considering the developments during April, we witnessed interest rates on short-dated, good-quality corporate bonds briefly move above 6% (annualized return). We did look to take advantage of this brief period and reallocated some of our maturing bonds/preferred stock from March and April into these positions. The average time frame of these bonds was less than 24 months. As we approached the end of the month, those opportunities started to subside. We will continue to monitor the fixed-income landscape to see if we can identify 6% yields at a time when the forward-looking earnings yield of the S&P 500 is just over 4.1%. While we continue to add to our equity exposure, these types of bonds are in someone’s portfolio as the value is attractive.

iShares Gold Trust- (Ticker: IAU)- Our gold tracking position ended the month of April up about +0.51%. However, the monthly return does not indicate the volatile month the precious metal had. As we stated in our initial thesis on owning gold, this investment is not a long-term hold but more of an investment surrounding a pivot in monetary policy from the Federal Reserve. As April progressed, 2024 rate cut expectations came down, and market participants pushed out our trade closing event (selling a month or two after the first rate cut). According to the Fed Fund Futures market, December is now the battleground month for which market participants are putting their bets, so we see even odds of our first Fed rate cut.

Skyline Bankshares (Ticker: SLBK)- Skyline National Bank’s holding company announced a bolt-on transaction buying Johnson County Bank on April 17th. The SLBK management announced that the acquisition was immediately accretive to earnings. The projected earnback period for tangible book value is less than 2.5 years. The deal is expected to close during the second half of 2024. Overall, this transaction is expensive compared to other deals we reviewed. Skyline’s leadership referenced the cheap deposits as a major draw (1.04% total funding costs) to the agreement. We will watch this closely as we prefer the bank to buy back its stock at more than a 20% discount to tangible book value. In the meantime, we will collect a healthy and recently increased 4+% cash dividend.  

People’s Financial (Ticker: PFBX)- There were a lot of new developments regarding our Biloxi-based bank. First, activist shareholder and largest non-insider shareholder, Joseph Stilwell, lost in his quest to add a board member. The Federal Reserve has permitted him to increase his stake to almost 20% of shares outstanding, and I assume he will continue to grow his stake throughout the year. The bank continues to become shareholder-friendly as it announced a share repurchase plan to augment its current return of capital policy (which added a special cash dividend five months ago). The bank has a strong capital position and a conservatively underwritten loan book. Still, it has material unrealized losses on its municipal bond, U.S Treasury, and mortgage-related securities portfolio that could be a tailwind to increases in tangible book value as these positions move closer to maturity or if rates fall. 

April was a weak month for financial asset prices. The summer months could bring better stock market returns. Our relative outperformance this month encouraged us, as we will continue to work to be wise stewards of your hard-earned capital.

Best regards,

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Stash J. Graham

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