Auxier Report: Fall 2024
Fall 2024 Market Commentary
US stocks in the third quarter were boosted broadly by a combination of a Federal Reserve interest rate cut and a 17% drop in oil. In September the Fed cut rates by an aggressive 50 basis points even as the Gross Domestic Product (GDP) was above 3%. The S&P 500 once again reached all-time highs and ended the quarter up 5.89%. Big Tech has been the leading story in 2024 due in part to strong growth in the cloud driven by massive investments in Artificial Intelligence (AI) infrastructure. However, that industry was one of the worst performers during the third quarter. The S&P 500 Communication and Technology Sector Indexes ended the quarter up 1.7% and 1.6%, respectively, and only outperformed Energy which was down 2.3%. Energy prices have been on the decline in 2024 as global oil fell below $70 a barrel in September for the first time in nearly three years. Despite escalating conflicts in the Middle East and Russia, global energy demand has been soft. China has been a major factor in this drop. Record US oil production at 13.4 million barrels per day is helping on the supply side. This chart shows the rapid growth in oil production the US has experienced in just the last 10 years. The US is the largest producer of both oil and natural gas in the world. The Energy Information Administration is expecting residential natural gas prices in 2025 to reach their lowest level since 1977. Lower energy prices can act like a tax break and will be a positive development for the consumption-based US economy. Smaller-cap and value stocks performed very well during the quarter thanks to improving corporate profitability. Value stocks outperformed growth during the quarter in a reversal from the trend in 2024. The Russell 1000 and 2000 Value Indexes outperformed both the Russell 1000 and 2000 Growth Indexes. Capital was also spread more evenly between the largest stocks and the rest of the market. The S&P 500 Equal Weight Index was up 9.6% during the quarter and was the best performing major US benchmark.
Home Refinancing Boosted by Lower Rates
The housing market was one of the first areas to see a boost from the Fed’s recent rate cut. At the end of September, the average 30-year fixed rate mortgage in the US was 6.08% according to Federal Reserve Economic Data (FRED), and homeowners were quick to start taking advantage of lower rates by refinancing. According to the Mortgage Bankers Association, there were 20% more refinance applications the week of the rate cut compared to the previous week. Demand for refinance applications in the last week of September was 175% higher than the same week in 2023. While refinancing activity has been positive, new purchase growth has increased much more slowly due to high home prices and limited supply. Existing homeowners who would like to sell are not doing so because they’re locked in at low rates from several years ago, limiting the secondary home market. According to Federal Housing Finance Agency data from the first quarter of 2024, 85.7% of mortgaged US homeowners had a rate below 6%. New mortgage applications went up just 2% in the last week of September compared to the same week a year ago. Despite the continued growth in new households in the US, housing starts are not increasing. Census Bureau data shows that the US is building no more new homes now than they were 50 years ago. In addition, houses have become much less affordable with 80% fewer new entry level homes being built. According to Zillow data, since 2000, the average household income has doubled while the average price of homes listed on the site has tripled. By the end of 2023 the difference between new household formations and housing starts was at just over 2.5 million when including multifamily starts. While record-high home prices have presented challenges for prospective homebuyers the supply gap indicates that there could be many years of demand for new homes, which should provide support to the economy going forward. As rates continue to fall buyers waiting on the sidelines could start to look at the market even if home prices remain high.
Reshoring Could be a Boon to the Economy
Events of the last several years have led to volatility in the economy, but one benefit we are seeing is increased reshoring, especially in the manufacturing sector. The pandemic exposed how vulnerable supply chains were to global disruption and companies have been working to fix those weaknesses by bringing more manufacturing back to the US. According to Bank of America, during the first quarter of 2024 mentions of reshoring in S&P 500 company earnings calls increased by 128%–a larger increase than even mentions of AI. A UBS poll of over 1,600 senior US manufacturing executives showed that 70% in the US planned to move at least parts of their supply chain back home. Reshoring can simplify supply chains and help protect them in the case of a major global event. Another factor that has been driving reshoring is the introduction of more tariffs on imported goods. Tariffs increase costs for businesses which can motivate many to bring more of their manufacturing stateside. US manufacturing construction spending was $238.26 billion in August, a 190% increase from 2021. Ultimately reshoring should continue to increase jobs and propel economic growth through infrastructure investment. Manufacturing contributed just 10.3% to US GDP in 2023, but it has a strong multiplier effect on any sector. Every dollar spent in manufacturing adds an additional $2.79 to the economy.
Contributors
Financials were the best performing sector in the Fund during the quarter, outperforming the overall market thanks to strong bank and insurance earnings. With rates coming down there has been concern that bank earnings would feel the pressure, but that impact has not materialized yet with companies like Bank of New York Mellon, Central Pacific Financial and US Bancorp posting positive earnings. Banks are confident that IPO and merger deals will make a recovery in 2025. The hope that the Fed will be able to achieve their soft landing for the US economy has improved the outlook for banks and loan demand. Insurance companies like Aflac, Marsh McLennan, Unum, Travelers and Aon have also been performing well thanks to a hard market in pricing. According to data from MarketScout, the US commercial insurance industry saw a composite rate increase of 3.8% during the quarter. Insurance rating agency AM Best expects the current pricing trends to last longer than previous cycles due to an active catastrophe season. According to a report from Aon plc, insured losses from natural catastrophes in 2024 could be on pace to surpass the $125 billion in 2023. While significant catastrophe losses may present challenges for insurers, disciplined underwriters benefit as they are able to demand higher premiums and wider coverage. Consumer Staples companies like Philip Morris, Altria, Kroger, Keurig Dr. Pepper, Coca-Cola and Molson Coors also outperformed. Philip Morris has been a leader in moving to smoke-free products. Consumer spending has been on the rise. Deloitte is forecasting growth of 2.4% in 2024, which would be an improvement from the 2.2% increase in 2023.
Detractors
Despite being one of the strongest sectors so far this year, Information Technology ended up underperforming in the third quarter. Communications suffered as well. This comes as companies have faced tougher comparisons to their previous record earnings. Alphabet and Microsoft lagged. The AI boom at the start of the year led to enthusiasm followed by record capital expenditures in large language models, namely with NVIDIA. Now investors are questioning the return on that investment. We see better potential returns on investment for smaller companies in the inference and small language models that are more economical and are not on the cloud. They use less energy and the data is protected. The next wave of AI PCs should be much more powerful and more affordable for most businesses. Grand View Research estimates that the AI market will grow from an estimated $196.63 billion in 2023 to over $1 trillion by 2030.
The energy sector suffered following a 17% decline in oil prices during the quarter. Companies like Phillips 66, Valero Energy, Chevron and ConocoPhillips were negatively impacted.
Third Quarter 2024 Performance Update
Auxier Focus Fund’s Investor Class gained 7.42% in the third quarter 2024. Stocks in the Fund gained 8.12%. The S&P 500 cap-weighted index returned 5.89% for the third quarter, while the equal weight rose 9.60%. The Russell 1000 Value Index was up 9.43%. Fixed income investments as measured by the S&P US Aggregate Bond Index gained 4.78% while the longer dated ICE US Treasury 20+ Year Index returned 7.97%. Smaller stocks as measured by the Russell 2000 returned 9.27%. Stocks in the Fund comprised 94.3% of the portfolio. The breakdown was 85.2% domestic and 9.1% foreign, with 5.7% in cash and short-term debt instruments. A hypothetical $10,000 investment in the Fund since inception on July 9, 1999 to September 30, 2024 is now worth $67,147 vs $65,688 for the S&P 500 and $56,504 for the Russell 1000 Value Index. The equities in the Fund (entire portfolio, not share class specific) have had a gross cumulative return of 1,052.24%. The Fund had an average exposure to the market of 82.4% over the entire period. Our results are unleveraged.
In Closing
US stocks have enjoyed a number of positive tailwinds in 2024. The lack of new initial public offerings (IPOs) combined with a projected $850 billion in stock buybacks led to a favorable supply-demand backdrop. Credit spreads on high-risk corporates vs treasuries are at 250 basis points, close to record lows. In the last recession (2007-2009) high-yield bond yields skyrocketed, rising over 20%. The stimulus from government fiscal spending and the AI infrastructure build-out is further boosting the economy. Much of the government stimulus has yet to hit the market. Low oil and natural gas prices are acting like a tax cut while wage growth still remains strong with low unemployment. Global remilitarization and travel trends have aided US aerospace and defense companies. And finally, interest rates appear to be headed lower not just in the US but globally. On the downside we are monitoring the rampant speculation with the explosion of same-day options. The S&P has been doing great but at 22 times 2025 earnings with a dividend of 1.3% there is not much of a margin of safety. Record prices tend to correspond with record passive inflows like in 1999. What followed was the worst ten-year period in 200 years (12/31/99-12/31/09). Overpaying and overborrowing are the recurring investment sins that tend to sink reputations and businesses. Wall Street often emphasizes growth and demand but misses on the supply side. In the past, fervor surrounding industries like cannabis, fiber optic, crypto, and SPACs led to gluts of supply and new competition as well as torpedo pricing. We are currently concerned with the massive $200-plus billion investment into AI by the top four hyperscalers this year (Amazon AWS, Microsoft Azure, Google Cloud, Meta Platforms). Their voracious energy needs are bringing back investments into nuclear power. We have watched the risks in nuclear since the 1980s, from the storing of waste to cost overruns. Washington Public Power Supply System (WPPSS) built nine nuclear plants blessed with AAA S&P bond ratings. Eight of the nine went bankrupt due to cost overruns in 1983, resulting in the largest municipal debt default in history. Their folly was known as “Whoops.” More recently, Southern Company experienced massive cost overruns in the construction of their nuclear plant. In May Plant Vogtle was completed at a cost of $35 billion–seven years late and well above the original $14 billion estimate.
We continue to investigate and search for the “heart and soul” of many businesses and tend to favor founder or family-run companies that care deeply about operating the business rather than just money. Execution is key. Similar to 1999-2002, we are finding much more interesting double-play opportunities in smaller, high-quality companies.
We appreciate your trust.
Jeff Auxier
Before investing you should carefully consider the Fund’s investment objectives, risks, charges and expenses. This and other information is in the prospectus, a copy of which may be obtained by calling (877) 328-9437 or visiting the Fund’s website. Please read the prospectus carefully before you invest.
Fund returns (i) assume the reinvestment of all dividends and capital gain distributions and (ii) would have been lower during the period if certain fees and expenses had not been waived. Performance shown is for the Fund’s Investor Class shares; returns for other share classes will vary. Performance for Investor Class shares for periods prior to December 10, 2004 reflects performance of the applicable share class of Auxier Focus Fund, a series of Unified Series Trust (the “Predecessor Fund”). Prior to January 3, 2003, the Predecessor Fund was a series of Ameriprime Funds. The performance of the Fund’s Investor Class shares for the period prior to December 10, 2004 reflects the expenses of the Predecessor Fund.
The Fund may invest in value and/or growth stocks. Investments in value stocks are subject to risk that their intrinsic value may never be realized and investments in growth stocks may be susceptible to rapid price swings, especially during periods of economic uncertainty. In addition, the Fund may invest in mid-sized companies which generally carry greater risk than is customarily associated with larger companies. Moreover, if the Fund's portfolio is overweighted in a sector, any negative development affecting that sector will have a greater impact on the Fund than a fund that is not overweighted in that sector. An increase in interest rates typically causes a fall in the value of a debt security (Fixed-Income Securities Risk) with corresponding changes to the Fund’s value.
Fund holdings and sector allocations are subject to change and should not be considered a recommendation to buy or sell any security.
Foreside Fund Services, LLC, distributor.
The S&P 500 Index (also known as the S&P 500 Cap-Weighted Index) is a broad-based, unmanaged measurement of changes in stock market conditions based on 500 market-capitalization-weighted widely held common stocks. The Russell 1000 Value Index refers to a composite of large and mid-cap companies located in the United States that also exhibit a value probability. The Russell 1000 Value is published and maintained by FTSE Russell. The Russell 1000® Growth Index measures the performance of the large cap growth segment of the US equity universe. It includes those Russell 1000® companies with higher price-to-book ratios and higher forecasted growth values. The Russell 2000® Value Index measures the performance of the small- cap value segment of the US equity universe. It includes those Russell. 2000 companies with relatively lower price-to-book ratios, lower I/B/E/S. forecast medium term (2 year) growth and lower sales per share historical. The Russell 2000 Growth Index is constructed to provide a comprehensive and unbiased barometer for the small-cap growth segment. The index is completely reconstituted annually to ensure new and growing equities are included and that the represented companies continue to reflect growth characteristics. The S&P 500 Communication Services comprises those companies included in the S&P 500 that are classified as members of the GICS communication services sector. The S&P 500® Information Technology comprises those companies included in the S&P 500 that are classified as members of the GICS® information technology sector. The S&P 500 Energy comprises those companies included in the S&P 500 that are classified as members of the GICS energy sector. The S&P 500® Equal Weight Index (EWI) is the equal-weight version of the widely used S&P 500. The index includes the same constituents as the capitalization weighted S&P 500, but each company in the S&P 500 EWI is allocated a fixed weight - or 0.2% of the index total at each quarterly rebalance. ICE US Treasury 20+ Year Index (4PM), is a 4pm pricing variant of the ICE US Treasury 20+ Year Index, which is market value weighted and is designed to measure the performance of U.S. dollar-denominated, fixed rate securities with minimum term to maturity greater than twenty years. S&P US Aggregate Bond Index is designed to measure the performance of publicly issued U.S. dollar denominated investment-grade debt. One cannot invest directly in an index or average.
The Fed refers to The Federal Reserve System (FRS) and is the central bank of the United States.
IPO, initial public offering refers to the process of offering shares of a private corporation to the public in a new stock issuance.
Same-day options are options contracts that are set to expire before the end of the day. They are not special options contracts but rather regular options on their last day of existence.
Hyperscalers are companies that are driving innovation through their extensive data center infrastructure and cloud-native architectures.
The Energy Information Administration (EIA) is the statistical agency of the Department of Energy. It provides policy-independent data, forecasts, and analyses to promote sound policy making, efficient markets, and public understanding regarding energy, and its interaction with the economy and the environment.
Reshoring is the process of returning the production and manufacturing of goods back to the company's original country.
As of 9/30/2024, the Fund’s top equity holdings were: Microsoft Corp. (6.2%); UnitedHealth Group Inc. (5.6%); Mastercard Inc. (5.3%); Kroger Co. (3.8%); Philip Morris International (3.7%); Bank of New York Mellon Corp (3.4%); Visa, Inc. (2.8%); Bank of America Corp (2.7%); Merck & Co. Inc. New (2.7%); Berkshire Hathaway Inc. Class B (2.6%).
The views in this shareholder letter were those of the Fund Manager as of the letter’s publication date and may not reflect his views on the date this letter is first distributed or anytime thereafter. These views are intended to assist readers in understanding the Fund’s investment methodology and do not constitute investment advice.