Actively managed portfolio aiming to achieve a dividend yield that exceeds the average dividend yield of the companies included in the Russell 1000® Value index.
- The market finished the year on a high note, capping a strong year for equities. Inflation has begun to subside, and unemployment remains under 4% for the 22nd consecutive week. The underlying economy appears to be stronger than most anticipated.
- For the quarter ended December 31, 2023, the Strategy outperformed the Russell 1000 Value Index (the Index) on a net asset value (NAV) basis, due to strong stock selection. The information technology, communication services and health care sectors contributed the most to performance. Conversely, the selection in materials and industrials detracted from performance.
- Consumer confidence continues to increase, and there is cautious optimism that we can achieve the desired soft-landing scenario and avoid a recession going into the new year. Markets are already anticipating several rate cuts in 2024 which should be good news for equities.
U.S. equity markets ended the quarter on a high note, bolstered by economic resilience, waning inflation and a pause in the U.S. Federal Reserve’s interest rate hiking cycle. The S&P 500 Index rose by 11.69% and the Nasdaq Composite Index advanced by 13.56%. Information technology stocks led while utilities lagged. Growth stocks outperformed value stocks during the quarter, and small caps beat large caps.
The U.S. bond market staged a comeback during the quarter. The Bloomberg U.S. Aggregate Bond Index gained 6.82% on the unexpected strength of the economy. The 10-year U.S. Treasury yield moved from 4.69% at the beginning of the quarter to 3.88% by quarter-end as inflation eased and expectations of interest rate cuts in 2024 grew.
For the quarter ended December 31, 2023, the Strategy outperformed the Index due to favorable stock selection. The information technology, communication services and health care sectors contributed the most to performance.
At the individual stock level, not owning a position in Exxon Mobil Corp., a non-benchmark position in Pinterest, Inc. and an overweight position in Bank of New York Mellon Corp. added the most to performance.
Not owning a position in Exxon Mobil Corp. (XOM) contributed to performance. The company reported mixed results with weaker-than-expected free-cash-flow (FCF), largely due to reduced chemical margins.
A non-benchmark position in Pinterest, Inc. (PINS) contributed to performance. The company reported a strong quarter with significant revenue growth YoY. They also reported strong guidance as further acceleration is expected.
An overweight position in Bank of New York Mellon Corp. (BK) contributed to performance. The company reported a strong quarter with better-than-expected deposit trends. They also announced positive guidance with strong YoY growth.
An overweight position in Valero Energy Corp., a non-benchmark position in BP plc., and not owning Intel Corp. were the biggest individual detractors.
An overweight position in Valero Energy Corp. (VLO) detracted from performance driven by a decline in the refining margins between crude oil and products, gasoline, and diesel fue.
A non-benchmark position in BP plc. (BP) detracted from performance. The company reported disappointing earnings, primarily due to lower oil and gas prices and weak gas and marketing trading results.
Not owning a position in Intel Corp. (INTC) detracted from performance. The company reported a strong quarter on a recovery in the personal computer (PC) supply chain. Management also provided positive guidance above the consensus.
Current Strategy and Outlook
In our view, the side effects of the pandemic shock have mostly subsided, and inflation is the final piece of the puzzle. We view the recovery not as a classic business cycle, but as an economy trying to normalize following a natural disaster. First came the government-mandated lockdowns and the bust. Then came the re-openings and the effects of mega-policy stimulus. Lastly came the 180-degree reversal in monetary policy. Inflation peaked in June 2022 at 9.1%, which means that most of the disinflation we have seen since then has had little to do with Fed policy. We believe that disinflation could continue (and may intensify) over the next 18 months. Corporate earnings are accelerating as the U.S. consumer remains healthy and corporate fundamental factors are sound.
Companies mentioned in this report – percentage of Strategy investments, as of 12/31/23: Apollo Global Management Inc. 1.68%, Valero Energy Corp. 1.79%, BP p.l.c. 1.52%, NextEra Energy, Inc. 2.34%, Exxon Mobil Corp. 0% and Bank of America Corp. 3.77%, 0% indicates that the security is no longer in the portfolio. Portfolio holdings are subject to daily change.Commentary | 4Q23