Actively managed large cap growth strategy that relies on fundamental research and analysis to identify companies with strong and accelerating business momentum, increasing market acceptance and attractive valuations.
- The market finished the year on a high note, capping a strong year for equities. Inflation has begun to subside, and unemployment remains under 4% for the 22nd consecutive week. The underlying economy appears to be stronger than most anticipated.
- For the quarter, the Strategy underperformed its benchmark, the Russell 1000 Growth Index (the Index), on a net asset value (NAV) basis.
- Consumer confidence continues to increase, and there is cautious optimism that we can achieve the desired soft-landing scenario and avoid a recession going into the new year. Markets are already anticipating several rate cuts in 2024 which should be good news for equities.
U.S. equity markets ended the quarter on a high note, bolstered by economic resilience, waning inflation and a pause in the U.S. Federal Reserve’s interest rate hiking cycle. The S&P 500 Index rose by 11.69% and the Nasdaq Composite Index advanced by 13.56%. Information technology stocks led while utilities lagged. Growth stocks outperformed value stocks during the quarter, and small caps beat large caps.
The U.S. bond market staged a comeback during the quarter. The Bloomberg U.S. Aggregate Bond Index gained 6.82% on the unexpected strength of the economy. The 10-year U.S. Treasury yield moved from 4.69% at the beginning of the quarter to 3.88% by quarter-end as inflation eased and expectations of interest rate cuts in 2024 grew.
For the quarter ended December 31, 2023, the Strategy underperformed the Index on a NAV basis. Stock selection in the consumer discretionary, information technology and communication services sectors contributed the most to performance. Unfavorable stock selection in the industrials and consumer staples sectors detracted the most. An allocation to cash also detracted.
Key contributors to performance were CrowdStrike Holdings, Inc., Tesla, Inc. and Alphabet Inc.
An overweight position in CrowdStrike Holdings, Inc. (CRWD) contributed to performance. The company announced another strong quarter during the period and surpassed $3 billion in annual recurring revenue (ARR), the only security vendor to achieve this landmark. Management was also positive about fiscal year 2024 outlook.
An underweight position in Tesla, Inc. (TSLA) contributed to performance. The company reported disappointing results during the period with lower-than-expected revenue from factory downtime and price reductions. There also remains uncertainty in the current high interest rate environment, which CEO Elon Musk offered as rationale for the tepid outlook.
An aggregate underweight in Alphabet Inc. (GOOG) contributed to performance. The company reported a mixed quarter during the period with Google Search and YouTube beating estimates but a deceleration in Cloud revenue.
Key detractors from performance were Paycom Software, Inc., Broadcom Inc. and Lattice Semiconductor Corp.
An overweight position in Paycom Software, Inc. (PAYC) detracted from performance. The company had an uncharacteristically disappointing quarter and lowered the full-year revenue. Additionally, management provided lower-than-expected guidance for 2024 with the main culprit being Beti – PAYC’s new employee-guided payroll system which will continue to increase efficiency but also lower service revenue.
Broadcom Inc. (AVGO), a position we initiated in the quarter, detracted from performance with strong results prior to our taking a position. The company reported a solid quarter with strong VMWare growth and a better-than-expected outlook.
An overweight position in Lattice Semiconductor Corp. (LSCC) detracted from performance. The company reported an in-line quarter but expected 4Q23 guidance missed by a wide margin due to a broad-based deterioration in the industrial segment and ongoing communications weakness.
Current strategy and outlook
In our view, the side effects of the pandemic shock have mostly subsided, and inflation is the final piece of the puzzle. We view the recovery not as a classic business cycle, but as an economy trying to normalize following a natural disaster. First came the government-mandated lockdowns and the bust. Then came the re-openings and the effects of mega-policy stimulus. Lastly came the 180-degree reversal in monetary policy. Inflation peaked in June 2022 at 9.1%, which means that most of the disinflation we have seen since then has had little to do with Fed policy. We believe that disinflation could continue (and may intensify) over the next 18 months. Corporate earnings are accelerating as the U.S. consumer remains healthy and corporate fundamental factors are sound.
Companies mentioned in this report – percentage of Strategy investments, as of 12/31/23: CrowdStrike Holdings, Inc. 1.38%, Tesla, Inc. 0.86%, Alphabet Inc. 2.65%, Paycom Software, Inc. 0%, Broadcom Inc. 1.46% and Lattice Semiconductor Corp. 0%; 0% indicates that the security is no longer in the portfolio. Portfolio holdings are subject to daily change.