The market experienced another choppy month where the initial days brought noted weakness, and the subsequent end of the month brought strength. Overall, markets used a new tailwind from a supportive Federal Reserve to generate a winning month broadly for risk assets. The benchmark S&P 500 gained 1.51%, while the Dow Jones Industrial Average and the tech-heavy Nasdaq Composite index increased 1.81% and 2.51%, respectively. Precious metal gold was a strong performer in September, gaining 4.99%.
The Federal Open Market Committee (FOMC) met two weeks ago and actualized their monetary policy dovish rhetoric from the summer. They cut borrowing rates by 50 basis points to increase the odds of a soft landing. Concerns of a soft labor market became the focus of the Federal Reserve Chair during the summer. The softening continued into the fall, prompting the Federal Reserve to act—the Fed’s concern about the labor market centers around the lack of interest in hiring new employees. The hiring rate has been at its lowest since 2014, with no prospect of turning anytime soon. The Fed hopes that after a few more rate cuts, American businesses will show an increased interest in hiring. Consumers continued to be concerned about the number of jobs available, as evidenced by the most recent Conference Board survey, which saw fewer respondents seeing jobs as plentiful and more respondents finding jobs hard to get. We expect the unemployment rate to increase in a couple of days. Additionally, we expect the FOMC to cut borrowing rates again before the year’s end.
A couple of notable developments happened during the month. First, we exit the month with the major indices near all-time highs, with 35% of cyclical industry stocks trading at 52-week highs and as the Federal Reserve has started to cut interest rates. Over the last 75 years, there have been ten instances in which these occurrences have happened. Nine out of ten times, the S&P 500 was higher over the next six and twelve months, respectively. With so many economically cyclical stocks showing strength, the market struggles to see any weakness in economic growth over the near term. Second, three major domestic indices (S&P 500, Nasdaq Composite, and Russell 2000) experienced significant weekly reversals. At the beginning of the month, the world’s most benchmarked index (S&P 500) fell more than -4%, only to rebound the following week. Again, the stock market whiplash occurred while within arm’s length of the S&P 500 index at all-time highs. There have been only five other times since the late 1950s when this has occurred. The five times this happened, the S&P 500 was higher six months later, 100% of the time. The weekly price reversal is not a sign, but market participants are still very comfortable with the market, considering where the markets are trading. While not as loose as last summer, financial conditions remain relatively loose.
We still expect a positive bias for risk assets over the coming couple of quarters. The market will be volatile, and participants will have already made the easy money. We still like having exposure to assets with tangible value, strong balance sheets, and sound cash flow generation. You can still find these opportunities by trading a material discount to the forward-looking S&P 500 price-to-earnings ratio of 20.7x. Additionally, several sectors continue to trade at material discounts to their historical norms, which could represent a “special situation.”
Please see the following updates on existing positions held at the firm:
Equity Commonwealth (Ticker: EQC)—On September 19, the management team filed a preliminary proxy for shareholder approval to liquidate the trust. Leadership estimates that shareholders will receive aggregate liquidating distributions ranging from $19.50 to $21.00 per share. This guidance does seem a little light to us, but EQC should sell the last four properties in the coming couple of quarters. The company has approximately $19.20 in cash per share, making $0.10 – 0.15 per share per quarter, so the downside is minimal. We could add to the position soon as the asymmetry is attractive if the stock trades to the low $19s.
Camden Property Trust (Ticker: CPT)- In the second quarter, Camden Property Trust faced supply challenges in its Sun Belt leasing operations but saw improvement compared to the first quarter, and this positive trend continued into July. The company’s full-year guidance might be too conservative if this trend persists into the third quarter. Occupancy increased by 30 basis points to 95.3% in the second quarter, and the flat blended lease rates improved compared to the 1.1% decrease in the first quarter. Preliminary data for July indicates a 1.2% growth in blended lease rates, with another 30 basis points increase in occupancy. The guidance for 2024 same-store revenue and net operating income growth suggests a slowdown in the second half of the year, which doesn’t reflect the strong performance in July. Camden raised its 2024 outlook for core funds from operations by 5 cents at the midpoint to $6.79 per share.
Catalyst Bancorp (Ticker: CLST)– Last week, we talked to CEO Joe Zanco about the recent earnings, the bank’s return on capital program, and the recent weakness in the stock price. He is frustrated by the market’s lack of acknowledgment of the bank’s improvement. Net Interest Margin (NIM) grew 60 basis points during the quarter and looks to continue to grow throughout the year. The bank’s tangible common equity ratio still sits over 27% and is grossly overcapitalized. We encouraged the CEO to buy back more stock as it trades at an almost 40% discount to tangible book value (61% Price/TBV).Private Bancorp of America- (Ticker PBAM)– The California-based regional bank’s share price has run well in the last few months. In the second quarter of 2024, the return on average assets for the same period was 1.40%, while the return on average tangible common equity stood at 15.99%. Diluted earnings per share for the second quarter of 2024 amounted to $1.35, down from $1.36 in the prior quarter. Credit trends continued to show improvement, with total criticized and classified loans at $16.9 million, accounting for 0.85% of total loans, down from $27.4 million or 1.44% of total loans in the prior quarter. The net interest margin for the second quarter of 2024 was 4.48%, compared to 4.31% for the previous quarter and 4.73% in the second quarter of 2023. As of June 30, 2024, the total book value per share was $34.65. The recent book value represented a 3.3% increase quarter-over-quarter and a 20.2% increase year-to-year. Even after the run, we still like the bank’s intermediate-term prospects to produce a mid-teens return on equity annually.
Best regards,
Stash J. Graham
The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon.
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
Graham Capital Wealth Management, LLC (“Graham”) is a registered investment advisor. Advisory services are only offered to clients or prospective clients where Graham and its representatives are properly licensed or exempt from licensure