Investment Climate Oct 2023: Risk Off?

The third quarter of 2023 was marred by yet more consternation over the impact of higher interest rates on the economy and markets and in the early days of October we are witnessing more of the same. More specifically, some of the most innovative and growing public companies were sold off quite harshly as the “risk off” mentality took hold once again.   It appears that “risk” is being incorrectly associated mostly with growing companies. Innovation (and the companies that drive it) is the ultimate source of overall economic growth and yet the market appears to think otherwise at present.  Obviously, this is most impactful to our strategies that focus on growth.  Conversely, our strategy that focuses more on income and dividend growth (more established and “seasoned” companies) continues to perform relatively well in this environment. 

Of course, the calendar plays into this as well since September is historically the worst month of the year and October is the month in which most bottoms have been made in the broader stock market. 

For sure, the lack of liquidity, particularly in small to mid-sized companies, exacerbated the declines in share price for those companies.  It is important to understand that business fundamentals are generally not currently being considered in the pricing of company shares.  Instead, an incessant, hyper-focus on US Federal Reserve policy has entranced the short-term traders and caused what can only be described as an “artificial” mispricing of some of the most creative and innovative companies in the world. 

This will not last forever.   

However, until this fixation on the Fed and its monetary policy wanes, we are likely to continue to experience outsized price movements—both up and down.  This has created what we believe to be one of the best times to buy good growth companies (both public and private) in decades.  We particularly believe there is extreme value right now in certain “micro-cap” companies (the smallest of the small), many of whom have gone public in the last few years and have very good businesses, but who are trading at a fraction of the market value from when they originally came public. 

We are most focused on core technology (think semiconductor technology), enterprise software (companies whose products make other companies better), medical technology (minimally invasive procedures, for example) and certain areas of the consumer discretionary category where there are some very solid companies that have used creativity and imagination to deliver products and services to the public in ways that are very different than in the past.   

We remain steadfast in the commitment to our strategy of owning “well managed companies in front of fertile fields of future growth” through multiple market and economic cycles while complimenting that with solid income and dividend-oriented companies.  We are simply going through a particularly difficult cycle right now in the growth category, but this too shall pass, and we will look to take advantage of the myriad opportunities that have presented themselves in our current growth portfolios and potential new candidates.  Stay tuned. 

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