Financial Markets Review

A page flipping on the calendar was not going to put a halt to the strength we saw in equities last year. Fresh off an impressive rally to close out the last two months of 2023, the S&P 500 and Nasdaq continued their winning ways. In January, the S&P 500 tacked on another 1.6%, while the Nasdaq rose 1.0%. And as of this writing, the party continued through the first week of February. The S&P 500 made history, closing above 5,000 for the first time ever. In addition, both the S&P 500 and Nasdaq have now finished higher in 14 of the past 15 weeks. This is the best weekly winning streak for the S&P 500 going back to 1972 and the best for the Nasdaq since the 1990s.

Many of the same themes that were discussed ad nauseum in 2023 have carried over into 2024. In fact, the first few weeks of 2024 have been a microcosm of nearly everything we experienced last year. Let’s start with the power of mega cap tech and what we have come to know as the Magnificent 7 – Apple, Alphabet, Amazon, Meta, Microsoft, Nvidia and Tesla. Just as they did for most of last year, this group of companies continues to drive a significant portion of the returns seen since the start of 2024. However, even this group of stocks is starting to dwindle, as Apple, Alphabet and Tesla have not pulled their weight recently. A few analysts have now begun to refer to the remaining subset of stocks as the Fantastic Four. Through the first week of February, Amazon, Meta, Microsoft and Nvidia have soared an average of roughly 26%, with these four stocks contributing nearly 75% of the total gain in the S&P 500 so far this year. And like last year, the strength of these companies has created a significant divergence between the S&P 500 (market-cap weighted) and the equal-weighted S&P 500. Only five weeks into 2024, and the S&P 500 is up 5.4% vs. the equal-weighted S&P 500 being up a paltry 0.7%.

The second theme that has carried over from 2023 is the divergence between Federal Reserve and market expectations surrounding monetary policy. Back in December, it was the Fed who addressed the topic of commencing a potential rate cutting cycle in 2024 before inflation got back to their 2% target. As soon as the words “rate cut” were spoken, the market ran with it. And by the end of December, investors were pricing in a near 80% chance of the first rate cut taking place at the Fed’s meeting in March. In addition, investors went on to price in nearly 175 basis points of cuts by the end of 2024. Once again, market participants got ahead of themselves and proved to be overzealous regarding the path of interest rate cuts. After the Q4 GDP report showed the economy expanding by 3.3% vs. expectations of 2% and then non-farm payrolls expanded by 353,000 vs expectations of 185,000, the Fed was forced to dial back the market’s expectations of rate cuts and specifically the perceived timing of the first cut. Currently, the market and the Fed’s expectations are closer to being aligned with the market now expecting the Fed to do nothing at their next meeting in March. The market has also reset its expectations for the number of rate cuts by the end of 2024, dialing it back to 100 basis points of interest rate cuts vs. the Fed’s expectations of 75 basis points of cuts.

There is an awful lot to feel good about in the economy and the financial markets. The most anticipated recession doesn’t seem to be in the cards. On the face of it, the economy appears to be headed for the “no landing” scenario – sustained growth coupled with disinflation. And equity markets seem to be doing just fine in a world getting more accustomed to higher interest rates. However, the risks haven’t gone away, but rather the strong performance of the stock market has allowed many investors to look past them. It’s important to stay grounded amongst pervasive optimism and pessimism. Afterall, things are typically never as good or bad as they seem in the moment.

Tandem Strategy Update

The past several weeks has shown that opportunities can be had to both buy and sell stocks in a market that continues on its record setting path higher. In the market we find ourselves, where a certain industry, sector or theme dominates the headlines, there are often opportunities in the companies that seemingly become an afterthought. At the moment, we are living in a world dominated by AI and weight-loss drugs and nothing else really matters. If you look hard enough, value can still be found.

Over the past few months, we have been adding to two long-term holdings of ours – Brown Forman and Becton Dickinson. And within just the past couple of weeks, we’ve had opportunities to continue adding to these positions. Brown Forman produces and distributes whiskey, scotch, tequila, vodka, and wine under the following brands – Jack Daniel’s, Woodford Reserve, Old Forester, Finlandia, Diplomatico, Herradura, and Korbel. For the past couple of years, Brown Forman has managed its way through severe supply chain issues, as the limited availability of glass bottles hindered their ability to meet demand. Then just as their supply chain issues were getting cleaned up, the weight-loss drug craze hit the mainstream casting a shadow of doubt over future alcohol sales. Through all the noise, Brown Forman has managed to plod ahead, slowly growing its business while growing their dividend to shareholders along the way.

Becton Dickinson is in a completely different business to Brown Forman, but the story is similar. It is one where the company has been faced with adversity for a couple of years now but has still managed to find a way to grow their business and dividend. Becton is a medical technology company that develops, manufactures and sells medical supplies, devices, lab equipment and diagnostic products. A couple of years ago, one of Becton’s main products, a medical infusion pump, underwent several recalls. Through the ups and downs of getting the product back to where the FDA could approve it for mass distribution again, the company managed to weather the storm by continuing to grow the other segments of their business. It was this growth that allowed Becton to continue meeting our investment criteria and for us to get another shot at adding to our position at what our quantitative model deemed to be an opportunistic valuation.

On the flip side, our quantitative model had us also trim back our exposure in a few companies for purely valuation reasons. These stocks were Amphenol, Costco and Expeditors International. Each one of these companies continues to meet our fundamental criteria, which is why we do not liquidate them from our strategies. Rather, when our quantitative model identifies a stock price that has simply gotten a little ahead of itself, we manage the risk in our position by taking a little off the table.

*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.

Source: Source of all data is FactSet, unless otherwise noted.

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.​