Fort Street Asset Management Q2 Update
www.fortstreetam.com
SECOND QUARTER REVIEW Equity Markets Blast Off: A resilient economy, moderating inflation, and the excitement over AI unleashed investor’s animal spirits, igniting a blistering rally in equity markets. To paraphrase Mark Twain, rumors of the market’s death have been greatly exaggerated. Contrary to most “expert” forecasts and investor’s expectations, the S&P 500 surged 8.7% in the second quarter and 16.9% for the first half of the year. Yet another lesson in the futility of trying to time the market or predict the future. Recession Fears in Question: Convinced that the economy was on the precipice of a recession, most investors took their chips off the table, parking their cash in high yielding money market funds, which significantly reduced selling pressure from above. As the economy remained resilient, equities soared while bonds have languished thus far. Not even a regional banking crisis, the threat of a US debt default, or a mutiny in Russia could put the kibosh on this Teflon coated market. While the banking crisis was unfolding, the market started to turn its gaze to the promise of Artificial Intelligence (AI). Market sentiment abruptly shifted from widespread risk aversion to sudden fear that the AI gravy train was leaving the station, sending many tech stocks to the moon. Fort Street Fund’s Positioning: Even though the portfolio remained conservatively positioned due to the high level of macroeconomic uncertainty, we were more bullish than most on the shorter-term outlook for the economy and equity markets. While our call proved to be accurate, we did not foresee the AI fueled rally. Neither did anyone else. To illustrate, all 40 sell-side analysts missed Nvidia’s recent revenue guidance for 2024, from $7bn to $11bn. Market Leadership: Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla, and Meta (dubbed the Magnificent Seven) accounted for a whopping 83% of the S&P 500’s total returns for the first half of the year. By comparison, if you exclude these seven stocks, the index would only have returned 6.3% in the first half. Not all of big tech’s returns were based on AI. The top five stocks in the S&P 500 in terms of market capitalization are expected to post a 16% increase in profits in the first half of the year. That compares to a 7% profit contraction for the S&P 500 overall. China and Hong Kong Lagging: While most equity markets are performing well this year, China and Hong Kong have struggled. Hopes for a Covid reopening rebound have been hindered by a challenging debt crisis, falling house prices, cautious consumer sentiment, a moribund economy, a regressive political system that is at odds with growth, and deteriorating demographics. The possibility that China might invade Taiwan doesn’t help economic prospects for the Greater China region.
OUTLOOK AND STRATEGY For the most part, our views have not changed much from last quarter. While the economy appears to be in decent shape, it’s unclear if we are completely out of the woods. If we had to hazard a guess, the markets could run into choppier waters come September and October. At current price levels, the market feels like it might be heading into no man’s land, confounding bears and bulls alike. We don’t possess a crystal ball so will continue to focus on the hard data, letting fundamentals guide our investment decisions. We thought it might be helpful to lay out some possible tailwinds and headwinds to get a sense of how things look going forward. On balance, the picture continues to remain mixed, and risks on the whole have increased as prices and valuations are now higher. With plenty of dry powder, we stand ready to take advantage of any potential sell-off but recognize that the market rarely gives you what you want when you want it – as we have seen this year in spades. In the meantime, we continue to look for selective money-making opportunities, stress testing and fortifying the portfolio, while collecting a risk-free 5.5% return on cash.
