The stock market returned to its winning ways after President Trump was elected the next President of the United States. The move higher in risk assets was a welcomed development after a weaker close to October and a somewhat range-bound trade for stocks from mid-July (the S&P 500 was within 1% of where it closed on July 16th). The Dow Jones Industrial Average was the big winner for the month, appreciating 6.32%. The S&P 500 and NASDAQ Composite Index gained 3.42% and 3.44%, respectively. Our precious metal gold tracking position lost 4.01% this month as market participants are pricing fewer rate cuts from the Federal Reserve next year.
The Presidential Election was a resounding win for Republicans, as the party captured the Executive Branch and the Senate while maintaining the House of Representatives. Having both chambers at his disposal, President Trump will be able to implement his chosen policies. We hope that tariffs are not a part of the playbook, as the average American consumer struggles with higher prices. Hopefully, the recent talk in the media about new tariffs is being done for leverage in future negotiations. We think a couple of principles that every Republican agrees on and will be swift to implement are tax cuts and deregulation. Both principles are favorable for the near-term growth of the domestic economy. What this all means for inflation is a subject for another letter after we better understand what policies Republicans will agree to implement early in 2025.
The 10-year U.S. Treasury reached 4.17%, up from 3.65% a couple of months prior. We believe there is no stopping the massive Treasury supply that continues to flood financial markets, as, thus far, the concerns regarding the impact of high national debt and deficit have not been realized. We will, however, continue to weigh this dynamic moving forward. Inflation and economic trends influence Treasury yields, but so do supply and demand. Foreign interest in owning U.S. Treasuries is slowing compared to the growth of the national debt. American households will need to buy U.S. Treasuries, necessitating higher interest rates. We emphasize the 10-year U.S. Treasury because sudden rises in this part of the yield curve affect the price of risk assets like equities (see 2022 when the 10-year rate went from 1.5% to 3.85%).
Moving into 2025, we have a variety of variables at play that must be weighed in totality when determining how we should allocate our capital. First and most prominent is that the Trump Administration will prioritize pro-growth economic policies. Second, during his first term as President, he certainly kept an eye on the stock market’s performance and would make public-facing comments anytime there was a material drawdown in equity prices. A tertiary variable is our current starting point, as 2024 is very different compared to 2016. From a pure valuation perspective, markets are much more expensive now than in 2016. From a leverage perspective, there is significant debt in both the private and public sectors. Supplementally, the current Federal deficit and debt levels are nominally and historically high. In 2017 and 2018, it was much easier to make tax cuts to grow the economy and the deficit. Considering the rhetoric of the last couple of years, we wonder how much tax cuts can take place to stimulate the next leg of growth in the domestic economy. All of this occurs against a backdrop when financial conditions continue to be plenty lost. We believe that risk assets will increase over the near term, but you will want exposure to specific industries and asset types.
Please see the following updates on existing positions held at the firm:
Coterra Energy (Ticker: CTRA)— Coterra is not currently drilling or completing wells in the Marcellus region and is also reducing production due to weak natural gas market conditions. However, prices might increase in 2025 compared to 2024 as U.S. inventories have decreased from previously high levels, while additional domestic LNG capacity is expected to come online and boost feed-gas demand. Coterra may reactivate previously curtailed production and also begin completing wells again, potentially increasing output alongside an improving market situation. Other operators might follow a similar approach, which could restrict a price recovery. Due to its 2025 hedging, Coterra has exposure to rising commodity prices supporting netbacks, profits, and cash flow. With low leverage, the company is in a position to return surplus capital to its shareholders.
Cheniere Energy (Ticker: LNG)- After experiencing six consecutive quarters of decline, Cheniere’s EBITDA is expected to remain relatively stable in the fourth quarter. The growth in LNG exports, a more favorable margin on spot cargoes, and optimization of their portfolio through gas procurement and vessel sub-chartering have led management to adjust and narrow EBITDA guidance for the year upwards. We anticipate that it will surpass the midpoint of the newly revised range. The generation of free cash flow continues to be robust, and the company will likely continue to redeem small portions of its debt and repurchase additional shares in the fourth quarter. Train 1 of the Corpus Christi Stage 3 is projected to begin producing its first LNG by the end of the year. Although the commissioning volume will not contribute to EBITDA, it may enhance cash flow.
Mid-America Apartment Communities (Ticker: MAA)— Sun Belt-focused Mid-America Apartment Communities continue to move higher as their markets navigate higher supply growth levels than customarily accustomed. MAA faces challenges in maintaining occupancy due to high supply levels in its markets, a situation that has yet to be encountered by coastal competitors. Other operators in the Sun Belt are offering substantial concessions to improve occupancy in new developments in these areas, which may carry over the leasing pressure into 2025. We remain optimistic about the investment in the coming years, anticipating that the oversupply will eventually be resolved. The demographic trends in these leading Sun Belt cities will likely persist over the next decade. Although we are pleased with the positive returns, this industry leader has even greater opportunities.
Catalyst Bancorp, Inc.- (Ticker CLST)- Our Louisiana-based community bank announced on November 25th that the board of directors approved their fifth share buyback program since going public more than 3 years ago. The bank’s leadership team authorized the new share repurchase program to buy approximately 5% of the company’s outstanding common stock. We are encouraged that the bank continues to acquire its shares outstanding. Since their IPO, they have acquired almost 20% of all common shares issued. The bank has the cash and capital ratios to obtain more stock. We plan on conveying our thoughts to management before the end of the year.
We are pleased with account performance during November, which added to an already strong calendar year. As the year ends, please feel free to contact us at 1 (800) 780-7726 with any questions.
Best regards,
Stash J. Graham