Market Movers & Shakers

Major U.S. equity indices are coming off a winning first quarter. The S&P 500 gained more than 10% in the quarter, a second straight double-digit quarterly percentage gain and its best start to the year since 2019. The Dow Jones Industrial Average rose by 5.6% for its best quarter since 2021, while the Nasdaq Composite added 9.1%. The S&P 500 closed out the month of March higher, marking the fifth consecutive month of gains and notching its 22nd record closing high of 2024. Communication Services, Energy, and Information Technology have been the top performing sectors year-to-date, while Real Estate, Utilities, and Consumer Discretionary have been the biggest laggards. Real Estate was the only sector to post negative performance during the first quarter. Recent additions to the S&P 500, Super Micro Computer (SMCI) and Deckers Outdoor (DECK) are among the index’s top year-to-date performers. Tesla (TSLA) and Boeing (BA) have been the benchmark index’s largest laggards year-to-date. Market strength has broadened with meaningful outperformance from the S&P 500 equal-weight index in the month of March. The overarching theme in the market remains the ongoing rotation dynamics, with more cyclical sectors like Industrials, Financials, and Materials gaining traction while momentum and growth factors relinquish some of their dominance. This rotation may partly stem from quarter-end rebalancing dynamics, coupled with concerns about crowded momentum and growth positioning, as well as the macroeconomic tailwind favoring cyclicals. Overall, market participants have maintained a cautiously optimistic outlook as we move into the spring and summer months.

Equity market volatility remained relatively muted during the first quarter as the VIX was anchored below 15 for most of the period. The US Dollar Index finished the quarter higher by 3% while the price of gold rallied 9% to $2,250 an ounce and WTI Crude Oil surged more than 17% to $84 a barrel. The benchmark 10-year U.S. Treasury closed out the first quarter higher by 32 basis points, settling at 4.20%. Bond market dynamics have played a role in supporting equities this year in spite of a backup in yields. Bond volatility as measured by the Merrill Lynch Option Volatility Estimate (MOVE) index, which reflects the volatility in U.S. Treasury futures, has declined to its lowest levels since February 2022. Despite concerns from market participants about absorbing a substantial supply of Treasuries, including record auction sizes of 2- and 5-year notes, the bond market has so far been able to digest the record issuance without something materially breaking.

Valuations have expanded so far in 2024 with the S&P 500’s forward 12-month P/E ratio sitting at 21.0x, above the 5-year average of 19.4x and the 10-year average of 18.0x, per FactSet data. Given the positive equity market backdrop, the IPO window may be opening once more. Recent initial public offerings of Reddit (RDDT), Astera Labs (ALAB), and Amer Sports (AS) saw significant interest and positive performance in their first days of trading. Market breadth remains robust with over 84% of S&P 500 stocks trading above their 200-day moving average, the most since August of 2021, according to FactSet. Stocks have shown continued positive momentum as we enter into what has been a very strong seasonal stretch for the market over the last decade.

– Jordan Watson, CFA

Updates & News*

The first quarter of 2024 has wrapped. Reflecting upon Tandem’s strategy-level transactions this quarter, we made a few purchases and a handful of sales. Understanding what constitutes a sale for us is very important. Our sell discipline is extremely diligent, and math based. There are only two real reasons why we would sell a position. The first type of sale we could make is one done for fundamental reasons. This will occur when a company is no longer consistently growing the metrics that we value. Fundamental sales lead to the stock ultimately being liquidated and removed from the portfolio. The second type of sale we make is for valuation purposes – when a stock is signaled to be unsustainably overvalued in our quantitative model, we will reduce (not liquidate, just trim) our exposure to the position. Last quarter saw fundamental and valuation sales.

We liquidated Hormel Foods Corporation from all three strategies due to insufficient growth of late. Whole bird turkey dynamics continued to weigh on the business. Greater than expected turkey headwinds coupled with an uncertain consumer backdrop spelled trouble for growth. The company has shifted its emphasis from whole bird to value added turkey products. As a result, their full year fiscal guidance for 2024 came in lighter than Wall Street was expecting showing that growth would be further challenged this year.

SEI Investment Company and AbbVie have both had trouble growing of late as well. SEI is a technology and investment solution platform that connects the financial services industry. They oversee investment processing, operations, and asset management. SEI was trimmed in Large Cap Core and Mid Cap Core in early January. AbbVie’s patent on Humira has expired, making the drug susceptible to biosimilars. AbbVie was pared back in both Equity and Large Cap Core in mid-February.

We trimmed Costco Wholesale Corporation in early January in both Large Cap Core and Equity for valuation reasons. As an aside, management announced a special $15 cash dividend that was paid out on January 12th. This is not the first time that Costco has issued a special dividend. The company did in 2012 ($7), 2015 ($5), 2017 ($7), and 2020 ($10).

Other valuation sales included Expeditors International of Washington, Amphenol Corporation, O’Reilly Automotive, and Republic Services. Expeditors is a logistics company that operates in key port cities. Their primary services include airfreight, ocean freight, and custom brokerage services. Expeditors was trimmed in all 3 strategies. Amphenol designs, manufactures, and markets fiber optic connectors and interconnect systems. This includes high speed cable, antennas, and sensors. They are broken down into three segments: harsh environment solutions, communication solutions, and interconnect and sensor systems. Communication solutions is their biggest contributor to revenue, followed by interconnect and sensor systems. Their key products are fiber optics, high speed interconnect, and radio frequency interconnect. Amphenol was trimmed in Large Cap Core at the start of the year. O’Reilly Automotive resides in our Equity and Mid Cap Core strategies. Their business is broken out into two segments: professional services and at-home mechanics. Republic Services provides trash collection and other environmental services. Republic Services was trimmed in all three strategies in early March, while O’Reilly’s position was reduced in March as well.

In terms of purchases, we bought Becton, Dickinson and Company in Large Cap Core and Mid Cap Core in early February. Becton Dickinson is a medical technology company that develops, manufactures, and sells medical supplies, lab equipment, and diagnostic products. They are broken into three segments: medical, life sciences, and interventional. Brown-Forman is one of the largest spirits and wine producers. They are known for brands like Jack Daniels, Woodford Reserve, and Herradura tequila. The company is on the mend from the glass and logistical supply chain challenges it faced during COVID. In addition, the removal of UK tariffs on American whiskeys is helping the company to regain its ground. Brown-Forman was purchased in all three strategies in late January.

Lastly, we purchased ResMed, Inc. in all three strategies during the middle of February. ResMed is a global leader in digital health and cloud connected technologies. They are known for their sleep apnea masks and were the first to bring a nonsurgical treatment for obstructive sleep apnea to market. Their patented technology helps them to stand out from the pack, effectively building a moat around their business.

– Annie Klopstock


*The transition level activity taken by Tandem is applicable to new accounts and new money, not the composite or firm-wide level. New accounts and new money are not automatically invested on the first day. Rather, they are transitioned into our strategy over a longer time period that is dependent upon market conditions. Strategy level activity is applicable to the composite and action is taken at the firm-wide level.

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Disclaimer: Tandem Investment Advisors, Inc. is an SEC registered investment advisor.

This audio/writing is for informational purposes only and shall not constitute or be considered financial, tax or investment advice, or an offer to sell, or a solicitation of an offer to buy any product, service, or security. Tandem Investment Advisors, Inc. does not represent that the securities, products, or services discussed in this writing are suitable for any particular investor. Indices are unmanaged and not available for direct investment. Please consult your financial advisor before making any investment decisions. Past performance is no guarantee of future results. All past portfolio purchases and sales are available upon request.

All performance figures, data points, charts and graphs contained in this report are derived from publicly available sources believed to be reliable. Tandem makes no representation as to the accuracy of these numbers, nor should they be construed as any representation of past or future performance.