The stock market experienced a volatile month, with the benchmark S&P 500 declining 1.4%. The S&P 500 has dropped four of the last five weeks. AI-related companies were some of the most significant losers to start, helping the Nasdaq Composite index lose 3.97% for February. The Dow Jones Industrial Average was the best performer, falling only 1.39%. Precious metal gold was a divergent asset this month, appreciating 1.89% as geopolitical conflict and tariffs concerns dominated headlines. The Federal Reserve’s GDPNow is now projecting the US economy to contract 1.5% during the first quarter.
Consumer confidence has declined materially after a surge of optimism late last year, per the Conference Board. The overall consumer confidence index fell from 105.3 in January to 98.3 in February. The new policies of the Trump administration have significantly influenced consumer feedback in the Conference Board survey, particularly impacting perceptions related to the labor market. Fewer people viewed jobs as plentiful, and a larger proportion believed jobs were more challenging to obtain. Perceptions of current economic conditions worsened, decreasing to 136.5 from 139.9. Although the assessment of current business conditions showed a slight improvement, expectations for the future diminished significantly, with the outlook dropping to 72.9 from 82.2. Expectations for the stock market have also declined; only 46.8% of respondents anticipate rising stock prices over the next year. Additionally, average inflation expectations for the next 12 months have increased to 6%, up from 5.2%. As we have discussed, sentiment surveys can exhibit partisan bias. Nevertheless, the recent surge in consumer negativity warrants attention, as the risk of a self-fulfilling economic contraction could materialize if consumers start to save money due to a grim outlook. Historically, post-election shifts in consumer attitudes are often temporary, with consumers eventually prioritizing fundamental concerns like jobs and incomes. Recent fluctuations in financial markets reflect uncertainty regarding how Trump administration policies will affect inflation, employment, and the overall economic landscape.
The US labor market shows signs of stagnation as job gains slowed in January. Downward revisions in the establishment survey indicate that the employment level at the end of 2024 was significantly lower than previously reported, a concern we have consistently raised over the past few years. The annual update revealed that payrolls were 589,000 lower in the 12 months ending March 2024 than initially reported. In contrast, the household survey showed large upward revisions, suggesting that the labor supply was much higher than initially estimated. Nonfarm payrolls moderated to 143,000 in January, down from 307,000 in the prior month. For balance, the data from the past two months have been revised by a cumulative 100,000, with December’s payrolls adjusted by 51,000. However, we would not be surprised if future revisions are lower as the methodologies, particularly the birth/death model estimates, are refined. The government sector was the third largest employer and contributed +32k jobs, a trend unlikely to continue given President Donald Trump’s efforts to reduce the federal workforce. This all occurs at a time when businesses are hiring at a rate that continues to be at decade lows. Overall, the weaker labor market raises concerns that the economy could grow at a stagnating pace. At the same time, higher-than-wanted inflation levels prevent the Fed from being the accommodating force it has been when the time needed arises.
Please see the following updates on existing positions held at the firm:
Mid-America Apartments (Ticker: MAA)— The Sunbelt-focused multifamily REIT continues to operate well in an oversupplied environment, which has put downside pressure on rent growth. Outgoing CEO Eric Bolton projected that there will be a sharp decline in supply starting this year, which will help rent growth as we exit the year. He noted the lack of new builds the last year as financing costs jumped meaningfully due to the Fed’s rate hike cycle a couple of years back. In the earnings call, CIO Brad Hill mentioned that the REIT started to experience an improvement in pricing in January. For 2025, occupancy is expected to stay from 95.3% to 95.9%. MAA pays a 3.81% cash dividend that has grown by 8% annually over the last five years.
Skyline Bankshares (Ticker: SLBK)– Our Southern Virginia-based community bank announced net interest margin increased to 4.10% from 3.78% during the 4th quarter. They closed on their merger with Johnson County Bank during the 4th quarter, which helped bring down the cost of funding for the combined bank. The loan book continues to be firm, with nonperforming loans to total loans at a very low 0.22%. The bank’sbank’s stock continues to trade at a material discount to the tangible book value of about 10%, which is inconsistent with SLBK’sSLBK’s good operating performance, where the Q4 return of average equity (ROAE) was an annualized 11.23%. We continue to collect a 3.86% cash dividend that has grown 15% annually over the last 5 years. The stock price has finally seen a moderate uplift over the past two months; we are monitoring this position closely for a possible sale.
UDR Inc. (Ticker: UDR)— Our Colorado-based national multifamily REIT generated solid results for the 4th quarter of 2024 while providing a slight increase to 2025 adjusted funds from operations guidance of 1%. On the earnings call, UDR leadership highlighted that the REIT hit the high end of its guidance for same-store net operating income (NOI growth). UDR expects a blended lease rate growth to improve in 2025 to 2.5%, with occupancy consistently above 97% early in the year. Like MAA, we wait for the oversupply to be meaningfully absorbed in the SunBelt/Southeastern US before we start to see a material uptick in NOI. In the meantime, we will continue to collect a growing 4% cash dividend yield.
Mr. Cooper Group (Ticker: COOP)– Mr. Cooper Group reported strong earnings for the fourth quarter, exceeding revenue and profit expectations. Company leadership highlighted the significant impact of the Flagstar mortgage banking acquisition, which added 1.1 million customers and represented the largest acquisition in the company’s history. The servicing segment generated $318 million in pre-tax income, reflecting a 39% increase year-over-year, while originations experienced a 38% sequential rise in funded volumes. Management has raised its guidance for return on tangible common equity (ROTCE) to 16% to 20% for 2025 and 2026, citing strong momentum and a balanced business model resilient to interest rate fluctuations. We continue to view this investment positively in a prolonged high-interest rate environment.
Thank you for your continued trust during these volatile times. We are glad to report that some of the defensive maneuvers we have undertaken in the last couple of months have limited the downside pressure that impacted broader markets. If you have any questions, don’t hesitate to contact the team!
Best regards,
Stash J. Graham