Interesting Fact:
A national survey of 2,000 Americans, evenly split by generation, revealed that 43% of respondents don’t know what a 401(k) is. And 35% don’t know what “interest” is in a financial context.
Thoughts on the Latest Selloff
What a difference a few weeks make! In 1Q 2024, the S&P 500 index advanced 10.2%, hitting a record high 22 times during the quarter. So far in April the index is down over 5% and has experienced zero new highs (the last new high being set in the final trading session of 1Q). This week the S&P 500 had its worst week since March of 2023 (decreasing more than 3%).
Oftentimes it can be difficult to peg down the precise reasons markets decrease, but we think most would agree that Fed policy (or guesses as to their future policy to be more precise) has been the biggest influence, with mounting indications of fewer interest-rate cuts in the near term. Data released April 10 showed March core CPI inflation of 3.8%, hotter than the 3.7% economists anticipated. While a marked improvement from earlier readings (that peaked at 9.1% in June 2022), this remains well-above the Fed’s 2% target and has plateaued, failing to exhibit any further downward progress since last summer. Real estate has been the worst performing sector in this backdrop (down 9.7%), unsurprising given its pronounced sensitivity to interest rates. The threat of conflict escalation in the Middle East with the recent attacks between Israel and Iran are also an ongoing concern.
The general consensus is that rate cuts have been delayed, not taken off the table (nor that a rate hike is more likely), a sentiment that we agree with. The Fed has been vocal about waiting for additional confirming data that interest rates are trending back toward 2%, and may be content to keep rates “higher for longer” in the interim. We stress that investors should keep the interest rate backdrop in perspective: although the 10-year Treasury yield has raced higher this year (from <4% on January 2nd) and especially this past month or so (up 40bps in April), the current yield of 4.6% remains low versus historical norms.
Are Higher Interest Rates Bad for Stocks?
Interestingly, higher rates do not necessarily mean that stocks won’t perform well. According to a recent research note by Brian Belski of BMO Capital Markets, the S&P 500 has averaged an annualized return of 9.1% when the 10-year is between 4% and 6%, compared to 7.7% when it is less than 4%, likely owing to stronger economic growth during periods of higher rates (since the Fed is apt to reduce rates during times of economic weakness). On that point, we note that recent economic data has been rather strong, with 4Q 2023 GDP of +3.4%, decent disposable personal income expansion (+0.2% in February from the preceding month), and unemployment at just 3.8% in March.
A market selloff is never pleasant yet can often feel more significant in the moment than it will in hindsight. Market retracements of the recent magnitude are in fact quite common: since 1980, temporary pullbacks of 5% or more have occurred roughly 4.5 times per year. Short-term market volatility is an inevitable part of the returns the market generates over time—a worthy tradeoff for longer-term wealth creation. As always, we encourage a long-term perspective that avoids trying to time the market (easier said than done we realize!).
I just finished interviewing Townsquare Interactive CEO Bill Wilson for The World According to Boyar podcast. I learned a lot about the company and can’t wait to share this episode with you. Stay tuned for its release!
It is worth noting that Townsquare was featured in our March 2024 Opportunity Report.
Notable Reads:
How Not to Invest in the Bond Market
https://www.wsj.com/finance/investing/long-term-bond-funds-how-not-to-invest-in-the-bond-market-22ca937f
If you read one article this week, read this one. It is especially relevant for those of you thinking of investing in bond funds as it tells you what not to do!
The Hottest Place to Golf in Augusta This Week Isn’t Augusta National
https://www.wsj.com/sports/golf/masters-augusta-national-topgolf-191b4424
AUGUSTA, Ga.—Neil Currie flew to North Carolina last week for the start of an epic golf trip with his buddies. First, they stopped in Charlotte on Thursday to play Quail Hollow, the exclusive club that will host next year’s PGA Championship. Then they headed south to attend the Masters on Friday.
Currie’s first time at Augusta National Golf Club surpassed even his wildest expectations. He watched Tiger Woods tee off. He loaded up at the gift shop. He also crushed six beers.
He was so fired up by the experience that he simply had to find somewhere to play golf himself. The problem is that teeing up at Augusta National wasn’t exactly an option.
So Currie went to the other popular golf venue in this city that draws a crowd this time of year. He went to Topgolf Augusta.
“I said, ‘That was the best day of my life!’” Currie said of his time at Quail Hollow from a stall at the souped-up driving range. “Then today I said, ‘Today is the best day of my life!’”
We were excited to see this article as we are big believers of what Chip Brewer and the team at TopGolf Callaway Brands are doing. We continue to think shares are undervalued at current levels.
Small Stocks Big Problems
https://www.ft.com/content/abfbf19e-f963-4c1b-b69e-7bef8896e8cd
A truism of finance is that risk and returns are correlated. The stocks of smaller companies therefore do better than bigger ones in the long run. This is a foundation stone of both investment theory and practice. Sure, they are more volatile and they can suffer long stretches of dismal performance — such as in the 1960s and late 1990s. But, over time, “small-capitalisation” stocks trump larger stocks in every single major market studied by academics over the decades. Across the world there are hundreds of billions of dollar invested purely on this basis.
And Yet:
The Russell 2000 small-caps index has now lagged behind the S&P 500 large-capitalisation index since its inception at the end of 1978, overturning a century of return data across multiple countries. These are admittedly price returns, since no total return indices go back this far. But including dividends wouldn’t change the picture. Larger companies tend to be more generous with their dividends, so it would probably only worsen the small-cap underperformance. And it looks even more stark if you start in 1984, when the Russell 2000 was actually born (with data going back to the late 70s).
The above article certainly does not fit with our belief that small cap stocks will outperform going forward. However, it is critically important to read the bear case of your investment thesis to see where you could be mistaken. In investing you must continually reexamine your investment thesis and try to break it.
From Cubicle to Corporate Icon, Costco Finance Chief Ends 40-Year Run
https://www.wsj.com/articles/from-cubicle-to-corporate-icon-costco-finance-chief-ends-40-year-run-52e986d1
On a recent overcast Wednesday, Richard Galanti was at his cubicle by 8 a.m., as usual.
What was unusual: It was his first week not being Costco Wholesale’s finance chief, a job he held for nearly four decades as the longest-serving CFO of a major U.S. public company.
The 68-year-old former finance chief influenced how Costco appealed to shoppers. Its members will find hardly any frills in the retailer’s warehouses and significantly fewer items—just 3,800 unique products—on the shelves compared with other large stores. Yet shoppers flock to Costco for everything from its popular Kirkland Signature shirts to diamond rings, the viral chocolate-peanut butter pie and occasionally gold bars.
During a recent visit in March to the wholesale retailer’s Issaquah, Wash., headquarters, Galanti, dressed in his standard Kirkland Signature dress shirt with a navy blue sweater and navy slacks, spoke of how the company’s uncomplicated model keeps customers coming back for more. The retail giant maintains a limited range of products but ensures they are of good quality, sometimes eclectic, and reasonably priced.
Interesting article on a fascinating executive and an incredible company. Worth a read.
Important Disclosures. The information herein is provided by Boyar’s Intrinsic Value Research LLC (“Boyar Research”) and: (a) is for general, informational purposes only; (b) is not tailored to the specific investment needs of any specific person or entity; and (c) should not be construed as investment advice. Boyar Research does not offer investment advisory services and is not an investment adviser registered with the U.S. Securities and Exchange Commission (“SEC”) or any other regulatory body. Any opinions expressed herein represent current opinions of Boyar Research only, and no representation is made with respect to the accuracy, completeness or timeliness of the information herein. Boyar Research assumes no obligation to update or revise such information. In addition, certain information herein has been provided by and/or is based on third party sources, and, although Boyar Research believes this information to be reliable, Boyar Research has not independently verified such information and is not responsible for third-party errors. You should not assume that any investment discussed herein will be profitable or that any investment decisions in the future will be profitable. Investing in securities involves risk, including the possible loss of principal.
Important Information: Performance Information. Past performance does not guarantee future results. The reports in this sample are for informational purposes only and the performance of the stocks selected is not indicative of the performance of all the stocks profiled in Boyar Research. The performance of the stocks selected and the performance of the stocks in Boyar Research may in fact diverge materially. Additional information regarding the performance of other companies featured in Boyar Research is available from Boyar Research upon request. This information is not a recommendation, or an offer to sell, or a solicitation of any offer to buy, an interest in any security, including an interest in any investment vehicle managed or advised by affiliates of Boyar Research. Any information that may be considered advice concerning a federal tax issue is not intended to be used, and cannot be used, for the purposes of (i) avoiding penalties imposed under the United States Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter discussed herein. Clients of an affiliate of Boyar Research and employees of Boyar Research own shares in Townsquare Interactive, and TopGolf Callaway Brands.