Weekly Investment Update (01/17/2025)

In our last Weekly Investment Update, we highlighted the market’s growing impatience with rising interest rates. Policy uncertainty, particularly around trade, and fears that inflation would continue to push rates higher were becoming a drag on stocks. This week was the opposite story. The Consumer Price Index matched expectations at +0.4% month-over-month (+2.9% year-over-year), while the more closely watched core inflation number, which excludes more volatile components like food and energy, was lower than anticipated at +0.2% month-over-month versus consensus estimates of +0.3%. Notably, annual headline inflation is now in line with the 10-year average, and annual core inflation declined for the first time since July. Subsequently, the 10-year Treasury yield has fallen from 4.8% to 4.6%. At the same time, stocks rallied as investors priced in a more balanced picture around inflation and future monetary policy, with several Fed officials commenting on the encouraging nature of the report.

As interest rates readjust to recent inflation data, both the economy and corporate earnings show no signs of material weakness. Banks’ earnings (more below) have been upbeat, while data around the consumer, labor market, and housing continue to support our view of a continuation of the economic expansion.

Lastly, the momentum behind the artificial intelligence theme was reinforced this week as Taiwan Semiconductor Manufacturing Co., a recently increased Bessemer holding, further boosted its capital expenditure forecast to a midpoint of $40 billion for 2025. This represents more than a 10% increase from prior guidance and underscores our conviction in the position.

Southern California Wildfires Continue Into Second Week

What is happening: The Southern California wildfires that started on January 7 have covered over 40,000 acres and resulted in more than 200,000 evacuations and thousands of homes lost. While the fires in the Pacific Palisades and Altadena are the most notable in terms of size and damage, in aggregate more than 20 fires in the LA metropolitan area started on or after January 7. The situation was exacerbated by unfavorable weather, such as high winds, low humidity, and drought conditions. So far, the total cost of economic damages is estimated to exceed $200 billion, and insured losses are very likely to be the highest ever for a wildfire.

Why it matters: These events are undoubtably saddening and tragic, and our thoughts and hearts are with the people and communities on the front lines. Ultimately, the fires’ impact on the overall national economy and GDP growth is likely to be small. The fires have been mainly concentrated in residential areas, which have a lower impact on economic growth than industrial buildings or critical infrastructure. With few places of business affected, the fires’ impact on employment is also limited. While some of the people who have been evacuated may not be able to work, the total number relative to the overall labor market is low. Currently, the number of people still under evacuation orders represents less than 0.25% and 0.03% of the population of California and the U.S., respectively. Moreover, temporary production shortfalls due to natural disasters are usually made up over time and rarely have a permanent negative impact on GDP growth.

One sector of the economy that has been most acutely affected is the insurance sector, with total insured losses estimated to be in the $10 to $30 billion range. However, most major insurance companies are well capitalized and have more than enough assets to absorb the projected payouts. Even assuming damages of $30 billion, that would translate to losses of less than 4% of shareholder equity for the most exposed companies, such as Allstate, Travelers, and Chubb. Moreover, insurance companies can increase premiums to offset the payouts over time. In total, we expect meaningful increases to California homeowner and business insurance premiums but minimal impact to average premiums nationally. The impact on insurance stocks has also been muted. The iShares US Insurance ETF (IAK) initially sold off 3% following the start of the fires but is now back in positive territory for the year. Bessemer’s equity portfolios have been underweight both the broad insurance industry and the property and casualty subsector.

Regarding fixed income, California has the largest municipal bond market in the country. The wildfires have affected a wide variety of municipal bond issuers, including school districts, public utilities, and mass transit, but the impact has been unevenly distributed. For example, Los Angeles public utility bonds have had the most spread widening relative to other bonds. While investors in diversified California municipal bond portfolios have experienced some short-term negative returns, we believe the long- term fundamentals of these issuers remain sound, and investors who hold the bonds to maturity have a high likelihood of getting paid in full. Municipal defaults in response to natural disasters are very rare, and there has been only one default related to wildfires. In many previous instances, issuers have been supported by a combination of financial assistance from both state and federal governments, higher sales tax revenues, and the issuance of new debt to retire existing obligations.

For those impacted, our insurance team has put together “10 Insurance Steps to Take After a Wildfire Loss“ and for those who would like to donate, our philanthropy team has provided the following information: “Disaster Relief Bulletin: Supporting Southern California Wildfire Relief & Recovery.”

Earnings Point to a Continued Strong Environment

What is happening: Fourth-quarter earnings season kicked off this week with banks reporting, which typically provides insight into the macroeconomic environment and sets the tone for the rest of earnings season. Earnings growth for the financial sector is expected to be the most robust among all 11 S&P 500 sectors, with banks being the largest industry contributor. Thus far, 22% of the S&P 500’s financial companies have reported, and 94% have exceeded earnings growth estimates.

Capital markets continue to be an area of strength. JPMorgan Chase reported a 49% year-over-year increase in investment banking revenue, while Morgan Stanley saw a 51% rise in equity trading. Additionally, Morgan Stanley noted that merger and acquisition pipelines are the highest in seven years.

This week also gave signs of consumer strength in both earnings and economic data. JPMorgan reported robust growth in consumer card spending, up 8% on the year. The control group for retail sales exceeded expectations in December, with gains being broad-based.

Why it matters: Expectations were elevated heading into earnings season, particularly for banks; their ability to deliver on earnings is a positive indicator for the remainder of earnings season. Management teams are optimistic on economic conditions, pointing to economic resilience and encouraged by the expectations for a pro-growth policy agenda. In turn, CEO confidence has been on the rise, a metric that can serve as a forward-looking indicator for economic activity, such as capital expenditures.

Consumer spending growth continues to underpin the economic expansion. The control group for retail sales is the metric that factors into the GDP measurement, and the stronger-than-expected retail sales print boosted expectations for consumption in the fourth quarter.

Robust capital market conditions are a key investment theme for the year, which we elaborate on in our Quarterly Investment Perspective, "2025: A Strong Foundation for a Year of Transition.” We have increased our allocation to the financial sector; the Bessemer All Equity Portfolio is now equal weight to the benchmark in financials. JPMorgan remains a top-10 equity holding, and we recently increased our exposure to Morgan Stanley.