Co-CIOs, Value, Discuss October Market Moves
U.S. equities were lower in October, with the S&P 500 and Nasdaq dropping more than 10% from their July peaks. While the S&P is still up 10.7% year-to-date, nearly all the return has been driven by the so-called “Magnificent Seven” (NVIDIA, Apple, Microsoft, Meta, Amazon, Tesla, and Alphabet) amid enthusiasm for the prospects for Artificial Intelligence with mega-cap tech stocks being the main perceived beneficiaries.
Despite the encouraging reports of robust retail sales and a strong Q3 GDP growth, the relentless surge in Treasury yields was a notable headwind to equities during the month. Stocks now have more competition as higher returns for risk-free assets make stocks less appealing in the short term as an investment option. This market dynamic reflects the market’s growing acceptance of a more prolonged period of hawkish policies from the Federal Reserve. On November 1, the Federal Reserve made the decision to hold interest rates steady. This determination came against the backdrop of a flourishing economy and a robust labor market. It marked the second consecutive meeting in which the Fed opted to keep rates unchanged, following a series of 11 rate hikes, including four in 2023.
On top of these financial dynamics came a worsening of a geopolitical landscape already darkened by war in Ukraine with the tragic October 7 attacks by Hamas on Israel. While financial markets have typically demonstrated resilience to events like these, there is a concern that this conflict could escalate further, potentially causing instability in an already fragile market.
Small-cap stocks remained under pressure throughout the month, continuing their trend of underperformance relative to the broader equity market in 2023. We continue to see abundant opportunities in small to mid-cap stocks, given the compelling valuation of the Russell 2000 Value, which currently trades at just 14x expected next twelve months’ earnings.
As value oriented stock pickers, we continue to seek franchise businesses with barriers to entry, pricing power, recurring revenue and large free cash flow generation that can successfully navigate any macro environment. Many of our holdings trade at significant discounts to Private Market Value, and could be attractive to financial or strategic buyers. We seek to use the volatility provided by Mr. Market to increase our stakes in great companies at attractive prices.
