Market Movers & Shakers

Stocks took a breather last week after their recent record-breaking climb. Declines were broad-based as the tech-heavy Nasdaq posted its second consecutive weekly decline while the small-cap Russell 2000 experienced its worst week of 2024. The S&P 500 posted its first back-to-back weekly decline since October. Consumer Discretionary has been the biggest laggard in terms of sectors over the past month, with notable weakness in shares of Tesla, which are down nearly 20% month-to-date. Despite the recent decline at the index level, market breadth has been improving over the past few weeks with positive performance from Industrials, Energy, Materials, Real Estate and Utilities. Per FactSet, 70% of S&P 500 stocks are trading above their 50-day moving average, up from ~50% of stocks a month ago, while three-quarters of the index are trading above their 200-day moving average. The pullback in stocks coincided with an increase in Treasury yields across the curve. The 10-year U.S. Treasury yield ended the week up more than 20 basis points, closing at 4.30%. The move higher in yields came amid more than $100 billion of Treasury auctions along with mixed economic and inflation data. WTI Crude Oil surpassed $80/barrel hitting multi-month highs while Gold surged to an all-time high, surpassing $2,200 an ounce. Volatility, as measured by the CBOE VIX, remains relatively muted though it has been slowly creeping higher since setting a low back in December.

Recent nonfarm payrolls data showed U.S. job growth accelerated in February, with the economy adding 275,000 jobs outpacing consensus estimates. Despite a beat at the headline level, data points below the surface suggest the labor market may be softening. December and January payroll gains saw large downward revisions, the unemployment rate ticked up to 3.9% (a two-year high), and average hourly earnings came in cooler than expected with downward revisions in the prior month. Market participants viewed the jobs data as a “goldilocks” scenario as job growth remains strong while wages are cooling. The combination reduces the market’s concern that strength in the labor market may drive inflation higher again. Speaking of inflation, February CPI and PPI numbers both came in hotter than consensus expectations. Headline February CPI increased 0.4%, faster than January’s 0.3% increase, and up 3.2% year-over-year. Core CPI (ex-food and energy) increased 0.4% from January, up 3.8% year-over-year and still well above the Federal Reserve’s official target of 2.0%.

In stark contrast to the market’s reaction following January’s hotter CPI print, markets seemingly shrugged off February’s hot inflation print. In fact, the S&P 500 went on to rally following the data release and closed at a new record high. The difference in reaction was largely due to the underlying composition of the inflation report. Once driven by increases in prices for goods and energy, inflation in the U.S. is now almost all driven by an increase in prices for services. Shelter inflation remains the driver of core services inflation and accounts for more than a third of overall CPI, though Jerome Powell has previously signaled that the Federal Reserve is focused on core services inflation excluding housing, also referred to as “supercore” inflation. Supercore inflation moderated in February after a surge higher in January’s report, leading some to believe January’s number was an aberration. However, supercore inflation still remains above 4% year-over-year and has proven to be stickier than the Federal Reserve would have otherwise preferred. Looking ahead, markets will be keenly focused on central bank meetings this week from the Federal Reserve, European Central Bank, and the Bank of Japan to provide further clarity on the future path of monetary policy.

– Jordan Watson, CFA

Updates & News*

Notably on the transition level, Tandem purchased Abbott Laboratories in its Large Cap Core and Equity Strategies last week. Abbott Laboratories develops and sells a wide range of medical products. The company operates through four segments: established pharmaceuticals, diagnostics, nutritional products, and medical devices. They are known for brands such as PediaSure, Pedialyte, and FreeStyle Libre. Their Medical Devices segment accounts for most of their revenues. Their latest earnings report noted that medical devices grew double digits because of higher growth rates in cardiac rhythm management products (CRM) and their vascular business. Within medical devices lies the FreeStyle Libre, a market leading continuous glucose monitoring system. FreeStyle Libre sales totaled $1.4 billion in Q4 2023, representing sales growth of 25.5% on a reported basis and 23.8% on an organic basis. For the full year 2023, its sales surpassed $5.3 billion. In dollar figures, the Libre has become the most successful medical device in history. As of their last release, management expects full year 2024 diluted earnings per share to come in around $3.20 – $3.40. 8 – 10% organic sales growth for 2024 is expected by reinvestment in their core business and strengthening their 4 segments.

On the composite level, we trimmed O’Reilly Automotive, Inc. in Equity and Mid Cap Core due to valuation purposes. Besides having a catchy jingle, O’Reilly distributes and retails automotive aftermarket parts and tools to professionals and DIYers. O’Reilly operates under a dual markets strategy as they cater to two vastly different customers. In 2023, 53% of their sales came from DIY customers, and 47% from professional providers. Management has noted that their growth strategy is to aggressively open new stores. To do this, they may build new ones, renovate old ones, acquire independently owned auto part stores, or purchase multi chain stores. Management notes they expect 3-5% store sales growth for 2024. Management believes the macroeconomic landscape is favorable for consumers, as shown by employment numbers, improved wages, stable fuel prices and moderating inflation. However, O’Reilly is still cautious in their outlook as there is potential for worsening economic conditions, and higher interest rates and gas prices.

Costco Wholesale, Inc. reported earnings on March 7th, 2024. Costco’s Q2 EPS increased roughly 19% year-over-year. Total revenue and net sales slightly missed. Management highlighted strong traffic increase, healthy membership trends, and continued margin expansion. Upbeat trends for food and non-food categories continued. They also reported improved sales on big ticket items, such as appliances. Costco is also in the process of releasing, a site that will allow members exclusive access directly to top quality brands at value pricing. Currently, there are 70 brands offered with 15 more in development. They expect to have 90 brands fully functional on this site by the end of 2024. This is a part of their effort to develop Costco’s e-commerce presence.

– 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.

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.