Cayside Review: 2024 Q1
Our newsletter including first quarter review, global market update and outlook, key numbers, and firm announcements .
Q1 Global Market Update & Outlook
U.S. Equity Markets continued a steady advance in the first quarter with the S&P 500’s sixth consecutive positive month. Equity markets registered strong first quarter returns: S&P 500 +10.2%; Dow Jones Industrial Average +5.6% and Global Equities (MSCI ACWI) +8.0%.
Bond markets in the U.S. retreated during the quarter as yields remain elevated but interest rate fluctuations have been volatile (Barclays Aggregate Bond Index was negative -1.0% in Q1). Hedge Fund managers performed positively during the month, up +2.5% as measured by the HFRX Global Hedge Fund Index.
Gold reached an all-time high during the quarter, marking elevated demand for assets typically associated with real interest rate imbalances and geopolitical concerns.
Since October of 2023, the S&P 500 has been on a consistent upward trend advancing approximately +25% in the past six months.While the companies in theS&P 500 have had growingearnings for three straightquarters (and grown earnings3.4% year over year), a largepart of S&P 500 equityreturns have come frommultiple expansion.
In contrast to more recent market rallies, the advance in equities has been broader based by market capitalizations, sectors, and geographies. Over this same time since October of last year, U.S. Small Cap Equities, as measured by the Russell 2000, have also advanced over +20%; the Dow Jones Industrial Average has gained over +20%, and European equities (MSCI EAFE) have gained over +23%.
Overall, risk assets have performed better than expected in the face of a higher interest rate and inflationary environment. With that said, in this quarterly letter we will discuss where we see opportunities, risks and where to be cautious. Ultimately, how we are “adjusting” while the sun is shining.
While S&P 500 price multiples have expanded, trading nearly 21 times forward earnings, when adjusted for inflation we see more normalized earnings yields for equities. If the economy remains resilient and inflation falls closer to the 2% target, we could see equities remaining in a favorable place for asset allocation.
Interesting Chart: The number of equities held as a percentage of financial assets is near an all-time high again.
Important Topics
INVESTMENT OPPORTUNITIES & RISKS
The Adoption of Digital Currencies and Bitcoin ETFs: While we have followed digital currencies for over a decade, we have typically not allocated money to this sector on behalf of clients because of certain risks, volatility, and lack of institutional investable access. However, recently the SEC has approved the formation of Bitcoin ETFs. Blackrock and Fidelity have led this initiative by launching ETF’s that are designed to track Bitcoin and opening up the digital currency asset class to a wider and more institutional investor base. The backing of these substantial asset management firms and custodians together with ease of investor access has changed the equation in this space. Historically, the supporters of bitcoin were largely early tech adopters. Now, the supporters of bitcoin are among the largest financial institutions in the world.
Liquidity Concerns: Liquidity, or the ability to convert assets to cash, is like the air we breathe, you don’t notice you need it until it’s not available. Then your life depends on it. Liquidity becomes paramount in times of stress, such as when businesses and investors are unable to sell an asset, when it is hard to access cash or favorable debt terms.
After a long and favorable cycle in private equity and venture capital markets, we are seeing more data associated with limited access to liquidity or capital raising. In times of stress, those that are illiquid are often forced to act irrationally and long-term capital can be lost. Not only does liquidity help a business or investor fund operational needs and other expenses throughout a downturn, but liquidity can also provide opportunities. When others must sell assets at below-expected prices, often as forced sellers, buyers reap the benefits of the discounted prices. We have been actively sourcing investment opportunities that can capitalize on more stress in credit and equity markets.
Inflation leads to a reduction in Consumer Spending: In speaking with business owners, reviewing recent comments on earnings calls, and other topical outlets, it has been suggested that there is a growing concern about spending and producer sales decreasing in line with an increase in prices in their respective fields (inflation). We will continue to monitor this as a potential risk to credit quality and current business earnings and valuation assumptions.
Meme Euphoria: A ‘meme’ is defined as an idea, behavior, style or usage that spreads from person to person within a culture. While meme behavior has likely been around since the beginning of financial/investment markets, the recent technology advancement in connectivity and ease of communication has led to a higher level of coordinated investing amongst investors. A movie starring Seth Rogen, (“Dumb Money”), was recently released documenting the meme phenomena (Gamestop) that took place over the past five years. The result of this has been abnormal price swings in companies that exacerbate valuations. In turn, this can create potentially dangerous investment and market implications.
Firm Updates
FIRST QUARTER INVESTMENT ACTIVITY
Small-Cap Companies: In past letters, we have written about the upside potential in small-capitalization companies that we feel have been under-owned, undervalued, and overlooked. The “Magnificent 7” stocks collectively account for roughly $13.2 Trillion in market cap and large cap US equities have benefitted from a tremendous amount of inflows. If a small portion of this capital was reallocated or rebalanced to small-cap companies, there would likely be material upside in small cap equities. Additionally, we feel there is an advantage in having expert managers in the space that focus solely on the opportunities and risks specific to the small cap market universe. The small cap equity universe is typically far less researched than large cap equities and lack of coverage creates large opportunity for active managers in the small cap universe. We have continued allocating to an active mutual fund manager in the space that has delivered strong returns outperforming small-cap equity indexes.
Data Center Companies: The rapid advancement in Artificial Intelligence (AI) has led to a bottleneck in the components necessary to handle the output required. While processing chips have advanced 20 to 40 times, the rest of the system required (power and data transfer amongst others) has lagged. We believe the data center industry can become an important component in the continued advancement of AI and benefit from increased cash flow and improvement in valuations.
Industry Conferences: The investment team attended the exclusive Morgan Stanley Annual Hedge Fund Breakers conference and the Goldman Sachs Annual Emerging Managers conference during the first quarter. These conferences and meetings with management teams provide thoughtful insights into the current investment world. A few of the highlights involved energy markets, Artificial Intelligence and global risks among others. These events combine some of the best investment professionals and allocators across the world, which helps expand our network while also broadening our overall views to make informed decisions.
BUSINESS UPDATE & PERSONNEL NEWS
Advisory Board Meeting: We hosted our first quarterly Advisory Board Meeting in January 2024, and we are beyond grateful to have a group of very accomplished professional investors, asset managers and successful entrepreneurs from various fields in finance. Our Advisory Board members have backgrounds in hedge fund businesses, family offices, and private equity. The boards’ participation is voluntary and is designed to discuss capital markets, economic trends and themes, and investment opportunities while also evaluating business strategies and opportunities. We are very thankful to have such a mindful group to help guide oversight of opportunities and risk.
One Year Anniversary and Growth
We celebrated our one-year anniversary last month. While we may have aged a decade during this short one-year period, we are incredibly grateful for all that has been accomplished for you and us. We set goals and we have exceeded them in a thoughtful and scalable way.
We now have Regulatory Assets Under Management of $162,495,036, and are in the process of registering with the SEC (Securities and Exchange Commission) as our firm size has met the required asset threshold. Previously, we were only able to be registered under the State of Florida. SEC registration offers higher levels of compliance and firm credibility, making it attractive for investment advisory firms and their clients. The higher level of regulatory scrutiny increases the credibility of our business, providing peace of mind for our clients, employees, and broader industry partnerships.
A NOTE FROM THE WHOLE TEAM | We look to constantly improve our offering of services to our clients including several family office relationships. We look forward to continuing our partnerships with our internal and external partners as we expand our network of clients, staff, and service providers. We appreciate your support and confidence in us!
Contact Us
Please do not hesitate to reach out to us with questions or comments. You can reach us directly here.
Disclosures:
Cayside Partners, LLC ("Cayside") makes no warranty as to the accuracy or completeness of any data herein. Information presented in this report is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities. Investments involve risk and are not guaranteed. Past performance is not indicative of future results. This report is intended for the recipient(s) only and not for further distribution without written consent.