Y H & C Investments March 2023 Update- Edition 174

Index January 2023 February 2023 Year to Date

Dow Jones

33,656.70 +2.83% -4.19% -1.48%

S& P 500

3,970.15 +6.18% -2.61% +3.40%

Nasdaq

11,584.55 +10.68% -1.11% +9.45%

Russell 2000

1896.99 +10.35% -1.81% +7.71%

Oil-

83.11 (Brent) -.53% -1.81% -3.35%

Gold-

1832.80 +6.14% -6.81% .15%

Silver-

21.005 -1.82% -12.77% -13.13%

10 Yr. Treasuries-

Yield-3.942% -37 bp100BP=1% +50 bp 4.4 bp

WSJ/

US Dollar Index

104.95 -1.38% +2.79% +1.38%

Bitcoin

23,127 +39.32% -2.10% +39.75%

Y H & C GARP Portfolio

(Returns not GIPS Certified)

+6.7% -3.8% +3.6%

Data comes from Interactive Advisors

Y H & C Concentrated GARP Portfolio

(Returns not GIPS Certified)

+5.8% -.4% +5.9%

Data comes from Interactive Advisors

U.S Economic & Financial Markets Outlook: Solid Economy Keeps Pressure On the Fed As Investors Waffle Between Concern and Enthusiasm! (Return figures in this section come from the February 27, 2023 edition of the Wall St. Journal. Y H & C Investments may have positions in companies mentioned in this newsletter. It is the responsibility of each investor to research the investments mentioned so they can decide on the appropriateness and suitability of the investments consistent with their risk tolerance, risk constraints, and return objectives)

In February, the Dow Jones Industrial Average lost 4.19%, the S&P 500 fell 2.61%, and the Nasdaq dropped 1.11%.  If you are a typical United States citizen, you are hard-working, loyal, and family oriented.  It would be more than a little understandable if you were concerned about the country’s current state of economic affairs. From one standpoint, namely of the average working stiff, it appears a low unemployment rate and strong consumer spending means the economy isn’t doing too badly.  Politicians and government officials probably would agree with this assessment.  The media keeps making note of a stubbornly high inflation rate.  About a year ago, we repeatedly heard what inflation was going to be, what was it called?  Oh, yes, transitory.  Now, the investment world, along with the journalists and analysts who are participants and actively involved in the industry, continue to fret about the Federal Reserve’s course of action.  Specifically, the apparent willingness to continue raising the Fed funds rate to slow down inflation.  As such, those with capital continue to worry about one thing or another.  If it isn’t higher interest rates, it is slower growth.  If not a sputtering economy, it’s the inflation rate being excessive.  It appears the average worker, the investor, and the government official all have at least one thing in common: nobody is happy with the current state of the economy. 

If one looks at the important financial statistics of the United States economy, it appears the state is relatively benign.  GDP is growing in the two to three percent range (naturally there are quarterly fluctuations).  Oil has retreated to the eighty dollars per barrel area.  Interestingly, the yield on the ten-year treasury remains lower than the two-year note.  The former yields 3.95% and the latter is at 4.80%.  The situation is called an inverted yield curve (shorter maturity yields are above longer maturity yields).  It is noteworthy for its accuracy in predicting a recession.  On the corporate front, the latter part of the earnings period is finishing up.  Many industries held up well.  Strength in energy, health care, some consumer discretionary, and specific parts of financial entities offset weakness in technology, housing, autos, and a few parts of real estate.

From an investment standpoint, the market continues to experience plenty of volatility.  There are certain Federal Reserve officials and high-profile investment strategists who continue to repeat the theme of an impending recession.  Most of the data don’t show the opinion being valid.  So, the obvious question becomes what to do with capital.  Much depends on your personal perspective and specific situation.  Remaining open-minded and opportunistic for businesses you might want to own stock in is a strategy the average joe might just consider reasonable.  Doing nothing until one feels more comfortable also seems logical, too. 

Global Economic & Financial Markets Outlook-Strong European Markets Force Investors to Consider Why? (All country index data provided by countryeconomy.com, February 28, 2023,)

Over the last ten years, investors putting capital in European equity markets have earned a nominal return of two percent per year.  Many investors would not be content with a sub-five percent yearly return, so Europe hasn’t been very appealing for those seeking higher returns.  However, over the last few months, European indexes have seen improved results.  As an example of this glory, year-to-date returns of many European indexes are as follows: France (+12.27%), Germany (+10.35%), Spain (+14.16%), Italy (+15.76%), Greece (+21.45%), the UK (+5.75%), and Portugal (+5.23%).  Clearly, Western Europe seems to be quite popular for capital allocators.  Given the recent ten-year history, the important question is why now?

The most obvious answers reside in expectations and valuations.  Over the winter, the prevailing narrative was Europe would suffer a severe recession because of its huge cost premiums in energy and electricity.  With massive government subsidies easing the burden, energy prices have retreated and at the same time, improved economic activity has been surprising across the Eurozone.  Consequently, better than expected usually attracts capital and so is the case in Europe.  The other answer is based on the relative direction of interest rates versus the rest of the world.  It appears the European Central Bank will be raising interest rates through March, or possibly May, and then stopping at around the four percent mark.  It is a rate lower than the five percent destination investors have targeted for the Federal Reserve.  Given the lower final rate and earlier stopping date, capital headed towards Europe.  Looking ahead, the long-term energy supply is still a major question that must be addressed across Europe.  Additionally, the length and outcome of Ukraine and its ultimate cost are front and center for the entire globe. 

The Art of Contrarian Thinking-Understanding the Larger Forces in the Market: Focus on What Is Important! (YH & C Investments may have positions in companies mentioned in this newsletter. It is the responsibility of each investor to research the investments mentioned so they can decide on the appropriateness and suitability of the investments consistent with their risk tolerance, risk constraints, and return objectives)

As an investor, it is important to try and understand the dynamics involved across the market.  As a practical example, one situation which is currently taking place involves one of the top investment banks in the world.  It is a very influential participant in all capital markets.  Over the last year, the chief market strategist for the bank has adopted a very high-profile position of being extremely negative on equity markets.  As an organization that controls trillions of dollars, when one of its top strategy persons is saying sell at every moment he can, you have to understand their directive is a huge headwind for long investors.  It means you clearly should realize the market probably will face a period of time where the environment has a good chance of being difficult.  It does not mean the strategist is correct, or that they are the only capital affecting stock prices.  The beautiful part of it is if you are an investor who has a long-term approach, it affords you the chance to benefit from their sour outlook.  You get to choose any business you want and potentially take advantage of the sentiment which may have nothing to do with the company you are interested in.  The important question is are you correct about the quality of the business you want to buy stock in?  The other important consideration is to look for situations where these large institutions wouldn’t even come into play, typically in smaller-sized companies.  Anything less than a billion dollars in value is probably too small for the big entities to affect.  I hope this helps investors think about the larger forces in the market, their effect, and how to manage them.

Y H & C Investments- March Update

One of the interesting things about the current market is the narrative that as long as interest rates are headed higher, you should not own stocks.  Historically, this perspective has not proven to be accurate over a long period of time.  With regard to our specific holdings, it was gratifying that two positions we have owned for a very long time had a very strong month.  Plenty of questions were raised on these holdings; it is rewarding when they have a good month during a difficult period.  Of course, you must own them for a long time and accept difficult or no performance to reap the rewards when you see a nice benefit.

Thanks for reading the newsletter this month, and if you think it is worthy, recommending it to a friend or family member would be greatly appreciated.   

(Y H & C Investments may have positions in companies mentioned in this newsletter. It is the responsibility of each investor to research the investments mentioned so they can decide on the appropriateness and suitability of the investments consistent with their risk tolerance, risk constraints, and return objectives)