First Quarter of 2024

2023: Lessons Learned

Last year can best be characterized as a year of surprising resilience. Consider that despite high inflation, hawkish Fed policy, geopolitical upheavals, and the ever-looming specter of a recession, markets still delivered very strong returns. What lessons can we take from 2023?

First, the year reminded us that timing the market is an extremely difficult endeavor. Coming into the year, almost every Wall Street prognosticator was predicting markets would fall and yet the absolute opposite occurred. Instead of trying to time the market, staying invested and focusing on high-quality, resilient companies remained the best strategy for the year.

Next, the year reminded us that diversification is essential to a degree. While a handful of mega-cap stocks drove the S&P 500’s performance in the fourth quarter, we believe the first quarter rally of a broader range of stocks is a much healthier sign for future performance.

Lastly, the year reminded us that discipline always pays off. Adhering to our time-tested process and patiently awaiting investing opportunities was essential to navigating recent market volatility.

First Quarter of 2024: Shifting Dynamics

The first quarter of 2024 presented us with a mixed picture as we saw a cooling but not yet cold inflationary environment. This sparked a shift in market expectations – we started the year off with the futures market pricing in as many as six rate cuts for the year, yet that number has shrunk to only two expected rate cuts as of today.

Market momentum also picked up in the first quarter as the S&P 500 reported fourth quarter earnings that were up +7.5% year-over-year versus a meager +1.0% year-over-year for the entirety of 2023. These results were aided by strong macro-economic conditions as unemployment remains low, access to credit has been better than feared, and improving industrial and home sales data all point to a resilient economy.

Image Source: Strategas.

Outlook for 2024: Cautious Bullishness

As we look to the remainder of 2024, we are taking a balanced view of many factors that we believe will influence the market. Favorable tailwinds include:

1. Monetary factors. There should be continued impact from the monetary lag effect as the total US money supply has grown by ~40% since February 2020 with the Fed boosting the size of its balance sheet by more than 100% over a similar period. As a result, we expect to see further market growth as the lagging impact from this continues to play out.
2.  Consumers and corporations have cash to spend. The personal savings rate remains at a healthy 4.1% of disposable income and provides further spending power, while corporations are sitting on very strong balance sheets and continue to hire new employees.
   
   
   Image Source: Strategas.

3. AI’s transformative potential. Consider that Transformer AI models, more commonly known as Generative AI (or GenAI), could revolutionize productivity and further fuel corporate profitability. While we can debate how much of this is currently just hype, the reality is that corporations are already spending enormous amounts of capital to leverage this technology and our portfolios are well positioned to benefit.

   
4. Election year dynamics. Expectations of increased fiscal stimulus as the 2024 election cycle ramps up might provide a further tailwind to the markets.
   
   Image Source: Strategas.
   

As shown above, the S&P 500 has increased in each of the past 13 presidential re-election years as presidents like to prime the economy in order to minimize any economic fallout and maximize their re-election chances.

On the flipside, we do anticipate potential headwinds to the market as well:

1. Recent data points have shown that inflation is not declining as fast as expected. Inflation in the services sector has been the key driver of a higher consumer price index (CPI). If this does not dissipate it will continue to pressure corporate profit margins, and it will prevent the Fed from cutting rates
   
   
   Image Source: Strategas.
2. The world is becoming more uncertain as the current conflicts in Ukraine and the Middle East continue to pose risks for global markets. We saw an example of this late last year when maritime traffic through the Suez Canal effectively grinded to a halt due to the Houthis militant response to the Israel-Hamas war. This spiked freight costs as hundreds of commercial vessels re-routed to sail around South Africa.
   
   

All that said, we remain committed to our investment philosophy. We are searching for undervalued companies with strong fundamentals, pricing power, and excellent management teams. Our portfolios are positioned with a strong weighting not only toward areas undergoing decade-long secular growth, but also to non-discretionary and mission-critical spending such as enterprise IT, government funded construction, transportation and logistics for manufacturing and commerce, aerospace and defense and life science research and development.

We never know how the market will perform in the short term, but we continue to be very optimistic about the prospects of the companies we own over the long term.

As always, we appreciate the confidence you have placed in us and wish you the best for the remainder of 2024.

Sincerely,

Ed Zhang

This quarterly update is being furnished by Brasada Capital Management, LP (“Brasada”) on a confidential basis and is intended solely for the use of the person to whom it is provided. It may not be modified, reproduced or redistributed in whole or in part without the prior written consent of Brasada. This document does not constitute an offer, solicitation or recommendation to sell or an offer to buy any securities, investment products or investment advisory services or to participate in any trading strategy.

The net performance results are stated net of all management fees and expenses and are estimated and unaudited. These returns reflect the reinvestment of any dividends and interest and include returns on any uninvested cash. In addition to management fees, the managed accounts will also bear its share of expenses and fees charged by underlying investments. The fees deducted herein represent the highest fee incurred by any managed account during the relevant period. Past performance is no guarantee of future results. Certain market and economic events having a positive impact on performance may not repeat themselves. The actual performance results experienced by an investor may vary significantly from the results shown or contemplated for a number of reasons, including, without limitation, changes in economic and mReferences to indices or benchmarks are for informational and general comparative purposes only. There are significant differences between such indices and the investment program of the managed accounts. The managed accounts do not necessarily invest in all or any significant portion of the securities, industries or strategies represented by such indices and performance calculation may not be entirely comparable. Indices are unmanaged and have no fees or expenses. An investment cannot be made directly in an index and such index may reinvest dividends and income. References to indices do not suggest that the managed accounts will, or is likely to achieve returns, volatility or other results similar to such indices. Accordingly, comparing results shown to those of an index or
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