Given the many environmental shifts during the year (10-year yields ranged from 3.3% to 5.0%), we will confine our comments to the fourth quarter.

October saw the yield on 10-Year Treasuries reach the 5% milestone as the economy showed few signs of a recession on the horizon and the Federal Reserve emphasized its “higher for longer” narrative.  Then, in what can be labeled the “Immaculate Disinflation,” a stream of lower inflation readings ensued without being accompanied by the traditional (and expected) economic weakness.  Yields declined by roughly 1.2% points as investors concluded that the Fed would be comfortable letting financial conditions ease without first seeing economic pain.  Currently yields appear to discount significant Fed Fund rate cuts as early as March of 2024.  Feeding off the bond market rally, the equity market was off to the races with widespread participation, a factor not present for the first three quarters of the year.

Turning to our relative performance, significant impact was found in the following sectors:

Financials: A recent purchase in the largest asset manager   contributed as investors rewarded the company’s direct earnings   leverage to improving financial markets.

Industrials: A longer term position in the largest US manufacturer   of aircraft added significant value as investors gained confidence   in the company’s ability to overcome production delays.

Energy: Value was detracted by our holding in the leading oilfield   service provider as the stock’s performance was highly levered to   the decline in oil prices during the quarter.

Real Estate: Our underweight in this sector detracted as the group   outperformed in a falling investment rate environment.

Although the beginning of a new year is traditionally a time to forecast the economy and markets, we are going to minimize macro predictions for a couple of reasons.  First, one of the lessons of 2023 was that much of the S&P 500’s performance was created by a handful (actually, the Magnificent 7 is a little less than two handfuls) of stocks largely driven by company or industry specific fundamentals.  In fact, for a large part of the year almost all of the benchmark’s appreciation came from these stocks.  The other reason to avoid broad market predictions is that most prognosticators have been getting it wrong lately.  As an example, the Fed’s forecast for 2023 real GDP growth began the year at 0.4% but ended at 2.6%.  Just like 2023, we will keep our focus on individual stocks but offer a few observations:

  • The S&P 500 ended 2023 by appreciating for nine straight weeks. Our experience is that straight lines do not last long in financial markets so a bit of digestion would not be a surprise.  Any digestion would not likely be informative of the rest of the year.
  • Fixed Income markets are pricing in Fed rate cuts early in 2024. The timing of the cuts may disappoint but we believe the Fed will pivot from enemy to friend over the course of 2024.
  • It is currently difficult to ascertain what stocks are discounting in terms of the progression of the economy. The change in Fed policy tends to help investors look over any valley of economic weakness.  On the other hand, there was not a broad-based recession so how much recovery can we see of the other side of the valley?

Equity portfolios remain constructed stock by stock with emphasis on secular growth or idiosyncratic earnings drivers.  Sector weightings are generally in line with the benchmark.  An exception is defensive sectors, such as Utilities and Consumer Staples, which we find lacking in earnings acceleration potential.  For balanced accounts, duration has been lengthened in fixed income holdings reflecting a less inverted yield curve.  Additionally, the overweight in Treasuries has been reduced.

We look forward to the new year and wish health and prosperity to all in 2024.

 

Sincerely,

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Craig B. Steinberg         Matt Ward                 Bob Ruland

Although the statements of fact and data in this report have been obtained from, and are based upon, sources that the Firm believes to be reliable, such as Bloomberg, FactSet and the Bureau of Economic Analysis as of December 31, 2023, we do not guarantee their accuracy, and any such information may be incomplete or condensed. All opinions included in this report constitute the Firm’s judgment as of the date of this report and are subject to change without notice. This report is not intended as an offer or solicitation with respect to the purchase or sale of any security. This information is intended for informational purposes only. Actual portfolios may vary. Investing in securities carries a risk of loss. There is no assurance that the investment objectives will be achieved or that the strategies employed will be achieved or that the strategies employed will be successful. Past performance is no guarantee of future results. This presentation may contain forward looking statements or projections relating to future events or future performance. Such statements and projections are subject to a variety of risks, uncertainties and other factors, such as economic, political, and public health, that could cause actual events or results to differ materially from those anticipated in this presentation.

Craig Steinberg

Craig Steinberg

President/Chief Investment Officer

Robert Ruland, CFA

Robert Ruland, CFA

Senior Vice President / Director of Research

Matt Ward, CFA

Matt Ward, CFA

Senior Vice President / Portfolio Manager