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A Memorable November

In our September 29 letter, we noted that historically the S&P 500 Index has been quite strong in the 4th quarter in years when it was weak in August and September.  After the November rally produced the 7th best monthly gain in the past 30 years, the index was up 6.8% this quarter.  The advance was broader (more stocks rose) than the very narrow leadership we saw earlier in the year, but the so-called “Magnificent 7” stocks have still contributed the overwhelming majority of the index’s year-to-date returns.

The rally followed a report of strong economic growth in the third quarter.  The U.S. economy, the world’s largest, has proved resilient even as the Federal Reserve has raised its benchmark interest rate 11 times since March 2022 to fight the worst bout of inflation in four decades. Those higher interest rates have significantly increased consumer and business borrowing costs. But they have also helped ease inflationary pressures: Consumer prices rose 3.2% last month from 12 months earlier, a marked improvement from the 9.1% year-over-year inflation recorded in June 2022.  Consumer spending, the lifeblood of the economy, remained strong in the quarter as the job market remained healthy.  Employers are adding an average of 239,000 jobs a month this year and the unemployment rate has come in below 4% for 21 straight months, the longest such streak since the 1960s.

The combination of easing inflation and resilient hiring has raised hopes the Fed can manage a so-called soft landing – raising rates just enough to cool the economy and tame price increases without tipping the economy into recession.  However, the November report from the Federal Reserve noted the overall economic outlook has become less optimistic, and while price increases subsided across districts, they remained elevated.  The report raised key economic concerns including geopolitical instability, the impact of high interest rates, and looming risks of a recession.  While interest futures suggest managers are expecting several interest rate cuts in 2024, Fed Chairman Powell continues his “higher for longer” mantra.

November also saw the passing of Charlie Munger, the longtime CEO and Chairman of Wesco Financial and Warren Buffet’s partner at Berkshire Hathaway.  Charlie was a fount of investment (and life) wisdom and one of his central themes was that it is better to buy a wonderful business at a fair price than to buy a fair business at a wonderful price.  We agree and continue to invest in quality companies that generate streams of free cash flow and return a significant portion of that cash flow to stockholders every year regardless of the economic environment.

All of us at LVM extend our best wishes to you and your loved ones for a happy and blessed holiday season!

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