April 2024

To Our Business Partners


Things to ponder: 

  • Due to sharply rising interest rates, the cost of interest on the U.S. federal debt now exceeds our country’s defense budget.  At the same time, investment opportunities that looked profitable in the low interest rate environment are now money losers. Many companies will be refinancing low cost debt in the coming years, some at considerably higher cost. 
  • Net profit margins (income divided by revenues) of the combined S&P 500 companies peaked at 13.3% in 2021 and have declined to 11.4% in 2023 – still well above prior historical peaks of 7.4% in 2000 and 9.4% in 2007.  Declining interest rates after 2000 contributed to the differences.  In the high price inflation periods of the 1960s and 70s, profit margins declined considerably.  Why is this important now?  Because the double-whammy of rising interest rates and high inflation are likely to bring corporate profitability down sharply which is not yet reflected in stock prices. 
  • Relatedly, valuation measures of the stock market are near all-time highs, at a time when profit margins (discussed above) are also near all-time highs. In the last several years both measures have been moving in the same upward direction.  That is unlikely to persist.  Investors apparently are still expecting rates to decline from here, but inflation is proving stickier than expected.  We’ll see. 
  • The number of people dipping into their retirement accounts to cover living expenses has nearly doubled since before the pandemic.  The cost of living has skyrocketed for many people. 
  • 40% of the companies in the Russell 2000, an index of smaller companies, are unprofitable.  The performance of mega-cap companies in the S&P 500 gives the illusion that everything is hunky-dory. 

Because we’re most interested in preserving your invested capital, we tend to look at what could go wrong in the markets to protect downside risks.  While the environment is not all bad, we’re constantly looking for attractive opportunities no matter the current environment.  The market and economic backdrop warrants a careful evaluation of investment opportunies, with particular attention on valuation.   


Our group* of widely held stocks is priced at 91% of our estimate(s) of underlying value, virtually unchanged from last monthStocks are expensive, we’re building a list of stocks to buy at specific price points, and we wait patiently for those stocks to come our way. 


All market indexes rose in March, from 2-5%The smaller company indexes did the best, reversing the typical leadership the large cap stocks have maintained for quite some time now. For the first quarter of 2024, returns varied widely from 2-10%, with the large cap indexes again leading the way. Over the last twelve months, the large cap indexes continued to dominate, advancing 28-34%, while the smaller company indexes experienced gains of 11-20%. Again, large companies dominate the performance of the popular S&P 500 IndexOver the past year, the capitalization-weighted S&P is up 28% compared to an equally weighted calculation of the same 500 companies which is up only 17%The latter, in our view, is a better measure of “the market.”  Our group* of portfolio stocks compares favorably to most of the indexes over the last month, year to date, and last twelve months. 

Steve Nichols, CFA • Bill Warnke, CFA •  Andy Ramer, CFA

*The group of “portfolio stocks” — our Equity Composite for the purpose of evaluating investment performance — consists of 19 stocks that are held in our clients’ accounts. Portfolios might hold some or all of these stocks, depending on investment guidelines unique to each client, the timing of purchases and sales, and start dates of accounts. The performance of this group of stocks is a good proxy for our equity performance but might vary widely among accounts. Of course, past performance is not necessarily indicative of future results.

We hereby offer to deliver to you without charge a copy of our current Form ADV Part 2, in accordance with the U.S. Securities and Exchange Commission’s “Brochure Rule.” Please contact us if you would like us to send you a copy.