Dear Clients:
While we don’t focus on short-term results, we’re pleased to report the strong absolute and relative-to-benchmarks performance for client equity portfolios this year (and last) continued through the quarter ending September 30, 2024. While nearly 100% of the gain in the S&P 500 Index in the first half of 2024 came from the “Magnificent Seven” mega-capitalization technology stocks (Apple, Microsoft, NVIDIA, Alphabet, Amazon, Meta Platforms and Tesla), the third quarter saw market “breadth” turn 180-degrees, with those same seven stocks accounting for less than 3% of the gain.
We’ve stated our belief the performance of the equal-weighted S&P 500 (all 500 stocks have the same 0.2% weighting) gives a better representation of how the “average stock” performed versus the traditional, capitalization-weighted S&P 500 (where the 10 largest stocks have a combined weighting of 38%). In our most recent update, we pointed out the performance gap between the equal- and capitalization-weighted S&P 500 had reached the highest since the peak of the dot-com bubble in late March 2000. Further, while past performance is no guarantee of future results, following the bursting of the dot-com bubble, the equal-weighted S&P 500 massive outperformed the capitalization-weighted S&P 500.
We’re pleased this turn occurred in the third quarter, with the equal-weighted S&P 500 posting a total return of 9.6% versus 5.9% for the capitalization-weighted S&P 500. Nobody knows if this is the beginning of a new trend or a one-quarter phenomenon. Unlike many, we’ve been around long enough to know the stock market will humble you. Rest assured we’re keeping our collective noses to the grindstone trying to uncover great businesses whose stocks are selling at attractive valuations, not celebrating
Similarly, we don’t mean to imply it was smooth sailing for stocks in the third quarter—it wasn’t. In our second quarter update (published July 9, 2024), we stated:
Not only has the S&P 500 had strong performance, volatility has been very low. It’s been well over a year since the S&P 500 has experienced a one-day decline of 2%. Knock on wood, in a few days we’ll eclipse the 350-trading day streak that ended in January 2018 (which was the longest since the 950-trading day streak that began in 2004).
You may recall 2021 was also a high-return/low-volatility “unicorn” that was followed by a brutal 2022. We don’t make predictions, but it would be wise to be mentally and psychologically prepared for a “typical” 10% correction, that could occur at any time for any or no reason. It’s all part of the journey.
Little did we know the long-awaited “down 2% day” would arrive on July 24, just eleven trading days later. The headline in The Wall Street Journal blared, “Big Tech Selloff Slams Nasdaq With Worst Day Since 2022,” with the “Magnificent Seven” stocks collectively losing $768 billion in market value. One week later, the Bank of Japan surprised investors when it hiked interest rates more-than-expected and announced a faster-than-expected tapering of its quantitative easing program. This caused a sharp rise in the value of the Japanese Yen, which led to a massive, simultaneous unwinding of the hugely popular (and debt-financed) Japanese yen “carry trade.” In turn, this led to a gut-wrenching global market rout, with the S&P 500 dropping 6% over the next three trading days.
Those downdrafts proved to be short-lived, but investors were once again tested in the first week of September when weaker-than-expected data reignited fears about the health of the U.S. economy. Market participants fretted the Federal Reserve had waited too long to lower interest rates, putting the economy in jeopardy of the dreaded “hard landing.” The Wall Street Journal headline said it all, “Stocks Extend Ugly Week of Losses Amid Economic Uncertainty.” The tech-heavy Nasdaq Composite plummeted 5.8% on the week, its worst drop since January 2022. The S&P 500 sank 4.2%.
With inflation heading in the right direction and the economy cooling, on September 18 the Federal Reserve finally delivered the eagerly-awaited interest rate cut. Investors cheered the larger-than-expected half percentage point cut, sending the S&P 500 to an all-time high (ATH) at the end of the third quarter (its 43rd ATH in 2024!). Referring to the quote at the top of the letter (still rings true 100 years later), sitting tight though the turbulence in the third quarter wasn’t easy (it never is), but getting scared out of stocks would have been a costly mistake.
Spotlight Stock: The Brink’s Company (NYSE: BCO)
We’ve become accustomed to tapping our phones or watches to pay with Apple Pay or waving/inserting our credit cards at point-of-sale checkout systems. More and more retail outlets have gone “credit card only” and we seem to be well along the path to a cashless society. However, cash remains an essential part of the global economy and we believe the cash management industry is full of opportunities.
When a sector is widely perceived be in decline, as independent thinkers and value investors we sometimes instead see opportunity. Brinks has been a trusted name for over 100 years. Brinks armored trucks are still ubiquitous sights at banks and retail outlets, picking up and delivering currency. Brinks operates in more than 100 countries and handles everything from transporting cash and valuables, managing ATMs and cash management. The company’s expertise in logistics and security has made Brinks the most trusted name in the cash management industry.
Brinks’ focus has shifted towards higher-margin services that solve today’s cash handling challenges. Two big innovations Brinks has introduced are Digital Retail Solutions (DRS) and ATM Managed Services (AMS). With DRS, Brinks uses “smart” safes and software to make it easier for retailers to handle and track cash. Businesses can get their cash deposits credited right away, even while the cash is still in the store, which helps with managing working capital. Plus, these “smart” safes help Brinks optimize routes, cutting costs and boosting profits.
With ATM Managed Services (AMS), Brinks takes care of ATMs from top to bottom, filling them with cash, processing transactions, performing maintenance and monitoring the machines remotely. AMS allows banks want to cut costs and focus on what they do best, a win-win.
Brinks has shown impressive financial growth and resilience. Over the past few years, the company has shifted from aggressively buying other companies to focusing on operations and returning value to shareholders. This strategic move has significantly increased profitability and cash flow generation.
Strong leadership is always crucial and the management team has shown foresight and adaptability. By choosing to focus on high-margin services like DRS and AMS, management has demonstrated a keen understanding of market needs and the future of cash management. We think people who believe cash services is a “buggy-whip” business doomed because of digital payments will be proven wrong. Further, in emerging markets where cash usage is still strong, we think Brinks’ global network positions the company perfectly to capitalize on opportunities.
Community Spotlight (Mickey on the Moose)
We’re invested alongside our clients because one of our core beliefs is “eating our own cooking.” Similarly, we’re also big believers in giving back to our community. For example, on September 20, Mickey Kim, KM’s Chief Operating/Compliance Officer went up on the roof of Moose Lodge No. 398 (Columbus, IN) at 8 AM to help raise money and awareness for Turning Point Domestic Violence Services (turningpointdv.org), which provides a shelter for victims of domestic violence and outreach to promote healthy relationships to prevent domestic violence. It was comfortable 60 degrees at 8 AM, but an unseasonally and uncomfortable 91 degrees by 3 PM (metal roof!). It was all worth it, because by the time he came down from the roof at 6 PM, the event had exceeded its goal of raising $100,000!
Turning Point’s President Whittney Loyd said, ”at a time when the demand for domestic violence services is on the rise, funding continues to dwindle. The funds raised through events like ‘Mickey on the Moose’ enable our agency to continue providing vital, life-saving programming for survivors and their families. Every donation from this annual roof-sit event directly supports Turning Point’s intervention and prevention services, helping to educate, inform, protect, and serve thousands of adults and children. While the funds raised are critical to supporting the body of work, the awareness raised by having ‘Mickey on the Moose’ was equally as important. Having Mickey as a community leader draw attention to an issue this critical and too often ignored is invaluable. This increased exposure to the community issue of interpersonal violence will help those who need services find Turning Point in their time of need and educate others to say something when they see something.”
Cooling off in the air conditioning and enjoying a cold beverage with Mickey after the event, long-time Turning Point supporters and KM clients Ro (Turning Point Board Member) and Charles “Shorty” Whittington summed up the day perfectly when they said, “it’s ALWAYS fun to do good things!” We couldn’t agree more!
KM Privacy Policy Notice
Under Securities and Exchange Commission Regulation S-P, KM is required to deliver its Privacy Policy Notice to each client prior to the establishment of an account and updates annually. We are delivering our 2024 annual update to each client account with this letter. In addition, given the increasing importance of protecting clients’ personal information, we have implemented a policy whereby KM personnel will not release any information about a client’s account without specific authorization from the client. If you would like KM to release information about your account to your CPA or other service provider, please contact KM’s Directors of Client Service, Matt Kirr ([email protected]) or Zach Greiner, CFP ([email protected]) by e-mail or at 812-376-9444 or 800-808-9444.
Q3 2024 Letter Inserts
Sep. 27 IBJ Article: People fret about elections, the stock market doesn’t
Regards,
Kirr, Marbach & Company, LLC
Past performance is not a guarantee of future results.
The S&P 500 Index is an unmanaged, capitalization-weighted index generally representative of the U.S. market for large capitalization stocks. This index cannot be invested in directly.
The S&P 500 Equal-Weighted Index is an unmanaged, equally-weighted index generally representative of the U.S. market for large-capitalization stocks. This index cannot be invested in directly.