During December, the S&P 500 and Bloomberg Barclays US Aggregate Bond Index fell by 238 bps and 168 bps to 25.02% and 1.25% YTD. In retrospect, the usual Santa Claus rally took place early in November, while the majority of equity and fixed income markets experienced negative returns in December. Looking at annual returns, the bear market in diversification continued, with the S&P 500 significantly outperforming all other indices for 1, 3, and 5 years. Some of the S&P 500’s 2024 strength is due to global funds being allocated to the US vs. poorly performing overseas markets. Still, US market exceptionalism is unlikely to continue indefinitely. It is hard to price certain US companies as if they will continue delivering EPS growth north of 30% per annum indefinitely if nominal GDP is increasing somewhere around 5%. At some point these two numbers will converge. As always, we remain committed to fundamentals and prudent diversification, with a focus on investments where we can have differentiated views. If and when the Magnificent 7 stocks become merely expensive, we will have more company.
We sold much of our cyclical shipping exposure In November and December, which we have started buying back beginning January 2nd. We divide our shipping exposure into three cylinders: preferred equities; equities with catalysts; and cyclical equities. Different segments faced different headwinds, but all were impacted to some degree by the weak Chinese economy. Some of our reduction in position sizes came from our 2025 forecast. The conflicts that caused ton miles to increase since the Middle East War and Russia invading Ukraine will likely be resolved. We see a significant probability that the Red Sea returns to normal and that sanctions relief will be part of any Ukraine ceasefire and peace agreement. Up until last week and the OFAC sanctions, everyone was negative about tankers, and there was virtually no good news priced into the stocks. We are long tankers today as we expected geopolitics to assert itself in January and favor VLCCs but expected Iranian sanctions first. This positioning proves the hoary truism in investing – you can be right for the wrong reasons.
While writing these observations, we looked back at our 2024 predictions made at the end of December 2023. At the time, we noted the gap between the accelerating growth in AI applications and the lack of focus on the necessary energy infrastructure to make it possible. In 2024, our traditionally boring and low multiple independent power producer and pipeline equities became of interest to growth and tech investors, contributing significantly to our 2024 performance. In January 2025, we are witnessing the end of the multilateral global order, just as World War I destroyed the world created by the Congress of Vienna (1814-1815). We are back to the power of the nation state, where a country’s interests become the dominant force in world affairs. Focusing on the implications for energy policy, it means that China will continue to generate more electricity from coal than the US does from all sources. Their focus on EVs is more about energy security given their lack of oil and significant coal reserves than it is a bold environmental vision. European political leadership has embraced aggressive decarbonization, and it has resulted in the willful destruction of their automotive and industrial manufacturing bases. We foresee more realism in European energy strategy, with the exception of the UK, where its embrace of socialism, new energy and tax policies all but assures a descent into poverty. In the US, the Trump administration will take advantage of vast US natural gas resources to maintain its leadership in AI and agriculture. In 2024, we predicted the new socialist government of the UK would create many new jobs. They just happen to be in Texas and China.
