On Thursday, the consumer-price index, a measure of goods and services costs across the economy, fell a bit from May, dropping the YoY inflation rate to 3%. This combined with weakening employment and wage growth, could open the door for the Federal Reserve to begin cutting rates as early as September. Now before one gets too excited, please keep in mind that there have been a lot of false starts in combating inflation and the Federal Reserve has a miserable history of being behind the curve. With that said, we saw a big move in interest rates, with the bond yields declining, causing bond prices to increase. In addition, we saw many real estate stocks have their best day of the year. More impressively, this occurred while Tech stocks sold off aggressively.
A day certainly doesn’t make a trend and things could easily reverse once again, but I do believe this provides a bit of a preview of how we expect our portfolios to zig when the market zags. When markets weaken, or when we get a bear market, I’d expect to dramatically outperform by a big margin. This year has seen one of the most concentrated and narrow bull markets in history. As of yesterday, the median return of the 50 largest stocks in the S&P 500 was 13%, while the 50 smallest stocks in the index were down 12%. 40% of the stocks in the S&P 500 are down on the year. Small cap stocks are also down on the year. This is very strange and atypical divergence that we have seen near previous market tops.
Remember, our strategy has been to capitalize on the high yields currently available in REITs and bonds and utilize our covered call and cash-secured put strategies to generate income and reduce risk. Our largest value stock position for those that have been clients for a few years has been Citigroup, which is up 50% since September. Most of our large financial investments that we’ve written about over the last few years are up huge, including ALLY, AIG, AGO, Bank of America, MTG, RDN, NMIH, etc. I don’t write about these as often anymore because I think the bigger current opportunity is in the REITS and even some of the fixed income investments that we like. We saw in 2022, when bubbles pop and the S&P was down 20% and the Nasdaq was down 30%, we were only down a few percentage points on average. It’s been quite some time since we have had a much larger pullback, but I believe the seeds have been planted, and I’m confident that we are built to withstand whatever storms pass through. We will see how things progress, but I was quite encouraged both with the CPI report, and how our positions responded to it.