Equity prices experienced a rebound during the first month of 2025. The ride was anything but smooth as we witnessed a material increase in volatility towards the end of the month. As a whole, markets did stabilize, but specific sectors generated noteworthy performances. Information Technology was the sole sector whose group lost value during the month for reasons described shortly. Healthcare, financials, and materials were the notable winners in January, showing a reversal from these sectors for most of 2024. The Dow Jones Industrial Average was the leading domestic index for the month, appreciating 4.7%. The benchmark S&P 500 and the tech-heavy NASDAQ Composite index gained 2.7% and 1.64%, respectively.
On January 27th, the Nasdaq 100 dropped by 3.7% after the emergence of China’s advanced large language model (LLM), DeepSeek, which demonstrated that training and inference can be accomplished using significantly fewer GPUs than US LLMs. The abrupt decline in technology stocks prompted by DeepSeek serves as a reminder of the fragile position many of these stocks occupy. The introduction of DeepSeek jeopardizes the strong capital expenditure forecasts already factored into the market. For instance, Nvidia’s stock plummeted by 17% on Monday, marking its largest decline since March 2020 and wiping out $589 billion from its market valuation. We do question the long-term implications moving forward. Alongside the pressure on tech firms, we also saw intense selling in energy producers, energy generators, and midstream companies based on the expectation that the same level of energy demand will not persist. Nevertheless, history indicates that as efficiency enhances, overall usage tends to rise as new applications emerge, increasing total power consumption.
A week before the sell-off associated with DeepSeek, the stock market recently reached a peak valuation across various metrics, including price-to-earnings, price-to-book, price-to-sales, EV/EBITDA, and market-cap to GDP. These rich valuations coincide with a time when investors are particularly optimistic about the stock market. Overall, the chances of a recession appear very low. The services sector of the economy remains strong, and the manufacturing sector, which is a key driver of the economy, has experienced a recent improvement over the past 90 days. We are uncertain whether this recovery in manufacturing is a response to potential tariffs, but we expect to gain some clarity in the upcoming months. With uncertainties surrounding monetary policy and persistent inflation expectations, such as the recent price increases reported in manufacturing and services by regional Fed surveys, the Federal Reserve faces significant challenges in reducing interest rates. Overall, we continue to see a decline in inflation contributions from shelter-related costs. Given that this is the most important component of both PCE and CPI measures, the decreasing pressure from shelter costs will counterbalance any substantial rise in inflation. Nonetheless, potential inflationary risks will remain a primary concern for Powell and his legacy, leading him to take proactive steps behind the scenes to influence or stay ahead of fiscal and tariff policies. In conclusion, it will be challenging for the historically high-priced stock market with overly enthusiastic participants to gain support from the Federal Reserve (as it has in the past) due to the inflation concerns prevalent during the last election season.
Please see the following updates on existing positions held at the firm:
Navigator Holdings (Ticker: NVGS)— On January 7th, Navigator Gas announced an agreement to acquire three handysize ethylene carriers, complementing the joint venture expansion project with Enterprise Products Partners, which is anticipated to triple the current instantaneous ethylene refrigeration capacity at Morgan’s Point from 125 tons per hour to 375 tons per hour, providing increased flexibility for customers and the potential to add additional capacity based on demand. The expansion was completed on time in late December 2024 and within budget. As we advance, the flex train is expected to increase ethylene export capacity at Morgan’s Point by at least 550,000 tons to 1.55 million tons per year starting in 2025 and potentially up to 3.2 million tons per year in the coming years.
Private Bancorp of America (Ticker: PBAM)– Our La Jolla, California-based regional bank reported strong 4th quarter numbers, showing deposit costs shrank while asset yields increased. As we discussed in our quarterly call on January 14th, the banking industry is in an excellent position for the near term. With the Federal Reserve cutting 100 bps since September, we are seeing the funding costs for banks come down. Separately, as the 10- and 30-year US Treasury yields increased over the same period, banks can make more return on their investments. PBAM has already started to experience this phenomenon as its net interest margin grew to 4.67%. Their tangible book value increased 19.7% yearly to $38.40 per share. The stock price has run up significantly since our initiation early last year. However, there are still so many catalysts that we are waiting on that would cause the stock to run up more, like uplisting the stock to the Nasdaq, where PBAM would be eligible to be added to indices like the Russell 3000 and hence have the ETFs buy their stock indiscriminately.
W.P. Carey (Ticker: WPC)— The net lease industrial REIT announced investment volume for the 2024 full year of approximately $1.6 billion at a weighted-average initial cap rate of roughly 7.5% and an average yield of approximately 9% (which reflects contractual rent escalations over the terms of the leases). During 2024, the company remained primarily focused on acquiring high-quality, single-tenant warehouse and industrial properties, comprising nearly 60% of its full-year investment volume, with retail properties containing approximately 30%. While the REIT’s stock has come under pressure from a growing 10-year US Treasury yield, we continue to like the 6+% cash dividend yield while we wait for WPC to reach our target price of $68 per share. W.P. Carey will not need to issue equity to help with FFO/AFFO per share growth in 2025.
Farmers & Merchants Bancorp, Lodi, CA (Ticker: FMCB)– Our California Central Valley-focused bank reported good earnings while increasing its strong low-cost deposit base. FMCB’s average total deposit cost for the year was 1.35%. The average loan yield at the end of the quarter was 6.08%. These rates allowed FMCB to achieve a net interest margin of 4.05%. The loan book continues to be strong, with non-performing assets totaling 0.03%. The bank remains well capitalized with a tangible common equity ratio of 10.46%, well above industry standards. Finally, FMCB’s profitability remains solid, with a return on average equity of 15.49%. The bank’s tangible book value per share ended the year at $800.24. While the bank is priced above tangible book value, the premium is not too expensive for a bank with FMCB’s operating metrics.
Earlier this month, Mike Berkhahn and I hosted an hour-long video call for clients. We discussed a wide range of topics, from President Trump’s priorities to inflation and the Federal Reserve, and shared the outlook for 2025. If you missed the call and want to watch, please respond to the email, and we will send you a link to the replay. We are glad to report positive performance for our investment accounts to start the new year!
Best regards,
Stash J. Graham