Market Movers & Shakers

U.S. stocks continued their relentless climb to new highs last week. The S&P 500, Nasdaq Composite, and Dow Jones Industrial Average all logged fresh all-time highs in February. The S&P 500 has now closed higher in 16 out of the past 18 weeks – a remarkable feat of strength that last occurred more than 50 years ago – and is up more than 20% over this period. In fact, the benchmark index’s move has been so unidirectional that it has been 86 trading days since the last pullback of more than 2%. The rally in stocks comes in the face of a hawkish repricing of interest rate cut expectations in 2024. Fed Funds Futures are now pricing in roughly three interest rate cuts from the Federal Reserve this year, down from the peak of more than 175 basis points of rate cuts expected just a couple of months ago. January’s CPI (consumer price index) and PPI (producer price index) data came in hotter than expected, lending support for the “higher for longer” narrative and pushing market expectations for rate cuts into the second half of the year. The market’s expectation of rate cuts is now mostly in line with the FOMC’s most recent SEP (Summary of Economic Projections) from its December 2023 meeting. The repricing of rate cuts this year has not solely been driven by inflation concerns. The U.S. labor market remains strikingly resilient with recent job gains spread across a diverse range of industries while economic growth remains robust as Q4 GDP growth remained strong. The U.S. consumer continues to spend, and though demand for goods has cooled, services demand remains strong. Yields have responded accordingly to recent economic data, with the 10-year U.S. Treasury ticking above 4.3% after falling to a low of 3.85% at the start of February.

Artificial intelligence continues to be a key theme fostering animal spirits among market participants. Nvidia’s earnings report in late February was such a big event for markets that prior to the release Goldman Sachs called it “the most important stock on planet earth”. Despite sky-high expectations, Nvidia beat forecasts for sales and earnings and raised its revenue guidance for the current quarter. Following the report NVDA shares closed more than 16% higher, adding $277 billion in market capitalization in a single trading day, easily surpassing the previous record of $204.5 billion set by Meta at the start of February. Nvidia has been the top performing stock in the S&P 500 this year, up more than 66% through the first two months and now boasts a market cap of more than $2 trillion. And while AI has stolen the limelight and garners most of the attention and conversations among individual investors, another pocket of the market has seen equally unrelenting momentum: GLP-1 drug manufacturers. Leading GLP-1 drugs like Ozempic, Wegovy, and Mounjaro were originally developed to treat diabetes. However their application expanded to treat obesity after studies found the drugs reduced hunger leading to weight loss. Novo Nordisk, the maker of Ozempic, is now the largest stock in Europe with a market cap of $550 billion, $100 billion more than the second largest company on the continent, luxury brand giant LVMH. Eli Lilly has surged into the top 10 U.S. companies by market cap and is now the largest pharmaceutical company in the world, up over 34% year-to-date and bolstering a market cap worth more than Pfizer and Johnson & Johnson combined.

There has been a notable bifurcation of late among the Magnificent Seven stocks, with weakness in Apple, Tesla, and Google shares year-to-date while Microsoft, Amazon, Nvidia, and Meta Platforms have surged higher. The divergence among mega-caps comes amid broadening market participation. The small-cap Russell 2000, the Russell Mid Cap, and the equal-weight S&P 500 indices all notched fresh 52-week highs last week. Despite their recent positive performance, small-caps continue to lag their larger constituents as weakness in small and regional banks continues to drag on performance. News out of regional lender New York Community Bancorp sent the stock down another 25% last week as the bank announced material weakness in internal controls over reporting related to internal loan reviews. NYCB’s CEO, who had been with the bank for more than 27 years, stepped down after the bank took a $2.4 billion impairment charge and the stock fell to its lowest level since 1997.

                                       – Jordan Watson, CFA

Updates & News*

Tandem has been very active on the composite front as of late. To kick off the month, we purchased Becton, Dickinson and Company in our Large Cap Core and Mid Cap Core strategies. Becton, Dickinson and Company manufactures and sells medical devices, instrument systems, and reagents. The company has three segments: Interventional, Medical, and Life Sciences. Interventional focuses on developing surgical, urological, and critical care solutions to better improve systems for patients. Medical supports safe and functioning work environments. This entails products to stop the spread of infection, advanced drug delivery, safe medication management, and innovative surgical improvements. Lastly, Life Sciences is at the forefront of clinical tests regarding infectious diseases and cancer. They offer research solutions, biosciences, and integrated diagnostic solutions.

Another healthcare stock we added to this month is ResMed, Inc. ResMed is a global leader in digital health and cloud connected devices. They are known for making sleep apnea masks. Their patented technology for obstructive sleep apnea has proven itself as an effective moat for their business. ResMed was the first company to successfully treat obstructive sleep apnea with a noninvasive treatment. Since the development of their sleep apnea mask in 1989, ResMed has been at the forefront of developing and acquiring innovative products for respiratory issues.

On the sell side, we pared back our exposure to AbbVie, Inc. in our Large Cap Core and Equity strategies. AbbVie is best known for Humira, a drug that combats ulcerative colitis. Humira’s exclusive market share came to an end in 2023. This means that biosimilars are now entering the market. Humira was one of the world’s highest grossing drugs for years on end. Humira is now being forced into the back seat, but that has not stopped AbbVie from drumming up new solutions. The company has a new dynamic duo: Skyrizi and Rinvoq. Skyrizi treats plaque psoriasis, psoriatic arthritis, and Crohn’s disease. Rinvoq treats rheumatoid arthritis, psoriatic arthritis, and ulcerative colitis. Management noted on their latest earnings call that Skyrizi and Rinvoq should exceed more than $27 billion in sales by 2027, and robust growth is expected into the next decade. Already, the growth of the two has been staggering. Skyrizi sales for the last quarter reflected operational growth of 51.6%, and 62.8% for Rinvoq.

We trimmed our exposure to Republic Services, Inc. due to valuation reasons last week. Republic Services is a waste disposal company. No matter what macro-economic backdrop, everyone must take out the trash. This line of business is very durable, and Republic has so far exemplified the ability to grow through any economic environment. This is a fundamental criterion we look for in the businesses we invest in.

Lastly, we finished our liquidation of Hormel Foods Corporation last week. Hormel has been facing headwinds in their retail business amid lower volumes and pressures from turkey prices, as well as an uncertain consumer backdrop and weakness in China. Management is still on the mend from previous supply chain inefficiencies and higher operational costs. The business ceased to meet our fundamental criteria and therefore had to be sold.

– 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.