News

Thought Leadership Series: The Perspective on Long Island’s Current and Future Economy

November 8th, 2023

Robert D. Rosenthal, Chairman and CEO, First Long Island Investors LLC (Left) and Matt Cohen, President and CEO of the Long Island Association (Right)

On November 8, 2023 clients and friends of First Long Island Investors, LLC gathered at the Garden City Hotel to learn more about Long Island’s current and future economy.  Joining First Long Island’s Chairman and CEO, Robert D. Rosenthal, for the discussion was Matt Cohen, the President and CEO of the Long Island Association.

Mr. Cohen has a distinguished background, previously serving as Executive Director of Government Relations for the Long Island Power Authority (LIPA), where he oversaw government and community affairs for the second largest public electric utility in the country at the time.  In addition to his tenure at LIPA, Matt served as Long Island Director for United States Senator Charles Schumer (now the Majority Leader), where he was the primary political and policy advisor to the Senator for all Long Island-related issues.  Matt has also worked as an aide in the Suffolk County Executive’s office.  

The conversation began with Mr. Cohen giving an overview of the Long Island economy, which he described as “resilient and “doing pretty well.”  Mr. Cohen cited various data points to support his claim, such as Long Island’s unemployment rate being below that of New York State and the United States overall.  However, it is not all perfect on Long Island and there is uncertainty stemming from inflation worries.  The problem with inflation is that Long Island is already a high-cost area and now houses and lifestyles are becoming even more expensive, which is why Mr. Cohen believes that affordability is “the existential threat to Long Island.”  This existential threat is why Long Island is facing a youth flight problem with an aging population.  Despite these inflation worries, Mr. Cohen pointed out that residents are still spending money and believes that the economy is on the “upswing.”

Mr. Cohen then provided a run down on the developments with Las Vegas Sands’ Nassau Hub Project.  New York State has recently made available contracts for three downstate casinos and there has been a lot of interest in these contracts.  The LIA held a vote and decided to support the Nassau Hub Project, believing it would bring hundreds of millions of dollars in economic activity as well as hundreds of jobs to Nassau.  Mr. Cohen addressed numerous concerns surrounding the project including safety, students, and traffic. Regarding safety, there would be “more law enforcement in the area than ever before.”  Mr. Cohen does not believe a casino would cause problems for nearby Hofstra University as casinos are extremely strict with forms of identification and students can already gamble online.  He also cited how many other colleges that have casinos next to their campus, such as Lehigh University in Pennsylvania, have not had problems.  Mr. Cohen does not believe Las Vegas Sands would spend significant money and time if they did not have a plan for traffic.  This part of the conversation concluded with Mr. Cohen mentioning that he is unsure of the timeline but believes it will take several years and that he is “cautiously optimistic.”  However, even if Las Vegas Sands does not get the casino license, the area will likely still be renovated.

In light of the disgraceful uptick in antisemitism following the October 7th attacks on Israel, Mr. Cohen addressed the problem of antisemitism on Long Island by stating that any form of discrimination is unacceptable, bad for business, and bad for the image of Long Island. The LIA will continue to speak out against all forms of discrimination.

The conversation ended with a discussion about specific sectors on Long Island, predominantly health care.  Mr. Cohen cited our health care system as a robust component of the economy as it supports nearly one in every five jobs on Long Island.  The health care system also has had a profound impact on the community.  One example that Mr. Cohen provided was Northwell Health investing a significant amount of money in a facility to support children’s mental health, which has deteriorated due to Covid-19 lockdowns.  Mr. Cohen believes Long Island’s future will have stronger ties to innovation led by health care institutions.  In addition to the strong health care system on Long Island, Mr. Cohen noted that the aerospace and defense sector also remains strong.

More about the speaker:

Matt Cohen became the President & CEO of the Long Island Association (LIA), the region’s leading business organization, in May 2021. Matt is working with the LIA’s Board of Directors and all LIA members to implement our vision for Long Island’s future, including making Long Island an attractive and more affordable home for young professionals and all residents, supporting small businesses, fostering a more inclusive economy and creating good-paying jobs. As President & CEO, he has created a new Small Business Support Program, updated the organization’s brand identity and website, introduced enhanced digital communications for members, launched a podcast, diversified the LIA’s Board of Directors, successfully advocated for federal and state resources for the region, and hosted national and regional policy makers and business leaders.

Matt previously served as the Vice President of Government Affairs & Communications at the LIA for 10 years. In that role, he was the chief lobbyist for the LIA’s legislative agenda, which included the enactment of a permanent state property tax cap and the receipt of billions of dollars in economic development investments on Long Island which included aid for transportation, infrastructure, housing, and downtown development. Additionally, Matt helped to coordinate the LIA’s response to COVID-19 and its economic impacts, providing critical assistance and real-time information to local businesses and advocating for federal and state resources for Long Island.

Prior to joining the LIA in 2011, Matt was Executive Director of Government Relations for the Long Island Power Authority (LIPA), where he oversaw government and community affairs for the second largest public electric utility in the country at the time with 1.1 million customers in Nassau and Suffolk Counties and portions of Queens. Before LIPA, Matt served as Long Island Director for United States Senator Charles Schumer where he was the primary political and policy advisor to the Senator for all Long Island-related issues. Matt has also worked as an aide in the Suffolk County Executive’s office.

Matt is a member of the Board of Directors for several Long Island organizations, including the Long Island Association, Child Care Council of Suffolk (as its Chairman), Discover Long Island (on its Executive Committee), the Long Island Housing Partnership, Accelerate Long Island, the Advanced Energy Research & Technology Center at Stony Brook University and the New York League of Conservation Voters – Long Island chapter. He was also appointed by Governor Kathy Hochul to serve on the Long Island Regional Economic Development Council. Matt is a graduate of The Energeia Partnership at Molloy College and was a member of Nassau County Executive Bruce Blakeman’s transition team. Matt has been recognized by City & State, Long Island Business News, Schneps Media and others for his work on behalf of the region, and honored by the Child Care Council of Nassau for his commitment to more affordable and accessible child care.

Matt earned a Bachelor of Arts in History (with a concentration in American History) from the University of Pennsylvania and a Juris Doctor from Hofstra University’s Maurice A. Deane School of Law. He was admitted to the bar in New York State in July 2012.

More about The Long Island Association:

The Long Island Association (LIA) is the region’s leading non-profit and non-partisan business organization and amplifies the voice of the business community.

As Long Island’s chamber of commerce, we work to ensure our economic vitality and provide regional leadership to guarantee a bright future for Long Island. 

Our organization accomplishes this through:

Advocacy – We engage policy makers on a broad range of issues that impact Long Island.

Networking – We foster connections for our members to help contribute to the growth of their businesses.

The mission of the Long Island Association is to lead and unify the region in order to enhance, strengthen and protect Long Island as a premier place to live, work and play. The LIA shall advocate for policies, programs and projects that create jobs, spur private investment, reduce the federal, state, and local tax burden, improve access to and from New York City and improve the overall business climate in our region. We will support economic development, workforce housing, greater state support for education, public safety, clean reliable energy, workforce training and retention, environmental protection, technology and infrastructure investments, and our not-for-profit organizations as well as opportunities for growth, equality, and diversity in our region.

More about First Long Island Investors, LLC: For over 40 years, wealthy individuals, families, and select institutions have come to rely on First Long Island Investors’ sound and focused approach to wealth—leading to peace of mind and confidence that their investments are being managed by a team they can trust.

Our Values

Trust In order to earn your trust, we take a 360-degree understanding of your overall financial picture
and couple that with sound, independent financial advice. All resulting in a transparent, successful,
and enduring relationship with you.

Service Excellence Our experience allows us to assist with all financial aspects of your life, everything from investing to estate and tax planning, insurance, family office services, and more.

Performance & Results Our objective is to deliver meaningful long-term investment returns. In fact, we believe in our investment philosophy so deeply, we invest our own assets side-by-side with yours.1

Helping Clients Achieve Their Goals

Our Investment
Philosophy
As a registered investment advisor2, we strive to provide clients with a prudent asset allocation that will yield meaningful returns while reducing risk and volatility.
Our ApproachWe provide a customized asset allocation, across four distinct categories: security investments, defensive strategies, traditional equities and private investments.The entire Investment Committee reviews each client’s asset allocation at least quarterly and recommends adjustments based on macro-economic and individual client circumstances.
Sound Investment ThinkingInvestment ideas are generated through proprietary research and analysis, third party research, and interaction with leading economists.  Investment opportunities are made available through our in-house strategies and top-performing outside investment managers.
Private Wealth Management ServiceWe understand the complex needs of our clients. That’s why we provide access to premiere private banking and lending services. We can help you simplify the management of your financial assets through our relationships with prominent bank and brokerage firms – everything from cash management services to customized lending capabilities.
Full Oversight of Financial Wellness*We work closely with your other key professionals to offer you complete wealth administration services.
*In conjunction with clients’ key advisors.

 Important Information

A copy of First Long Island Investors, LLC (“FLI’”) Form ADV Brochure and Client Relationship Summary discussing FLI’s business operations, services, fees and conflicts is available on the SEC website (www.adviserinfo.sec.gov), FLI’s website (https://fliinvestors.com/disclosure),  or from FLI upon written request.

FLI is neither an attorney nor accountant, and no portion of this presentation should be interpreted as providing legal, accounting or tax advice.

1. Our principals invest side-by-side with our clients in every FLI strategy (other than fixed income which is personalized for each client). Where a strategy is offered through different investment vehicles, our principals invest in the vehicle suitable for them, but not in every vehicle available.  2. First Long Island Investors, LLC is an SEC registered investment adviser. Any reference to First Long Island Investors, LLC as a “registered investment adviser” or as being “registered” does not imply a certain level of skill or training.

Certified Financial Planner Board of Standards, Inc. (CFP Board) owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNERTM, and CFP® (with plaque design) in the United States, which it authorizes used of by individuals who successfully complete CFP Board’s initial and ongoing certification requirements.

CFA® and Chartered Financial Analyst® are registered trademarks owned by CFA Institute.

Fall 2023 Market Outlook Web Seminar

October 24th, 2023

Equity markets have rebounded in 2023 while the bond market has declined slightly so far this year.  What does the balance of 2023 and 2024 hold in store for investors? How will elevated interest rates impact the economy and the equity markets? Will the Fed raise interest rates one more time in 2023 or 2024? When will the next recession begin and how severe will it be? 

These are just some of the questions we hear from clients and business partners. In this web seminar we share our current outlook for the markets as well as how we are positioning client portfolios for long-term growth.

DISCLAIMER

This presentation has been prepared for informational and educational purposes only by First Long Island Investors, LLC (“FLI”). This presentation should only be considered current as of October 24, 2023 (or as otherwise indicated in the presentation) without regard to the date on which it was received or accessed. As a consequence, events may transpire subsequent to the date of this presentation that can render the contents inaccurate or obsolete. FLI believes the information contained in this presentation to be reliable as of the presentation date but does not warrant its accuracy or completeness. No party is obligated to update the contents of this presentation. However, FLI maintains the right to delete, modify or supplement this presentation without prior notice.

The contents of this presentation are not intended to provide investment advice and under no circumstances does anything contained in this presentation represent a recommendation to buy or sell any particular security or to invest in any particular product. Nothing set forth herein shall constitute an offer to sell any securities or constitute a solicitation of an offer to purchase any securities. Past performance is not indicative of future results. Investment returns will fluctuate over time and may be volatile. Specific names in this presentation may have been presented as examples.  Such companies may or may not be currently owned (and may or may not have ever been owned) in FLI’s various strategies.  For a list of the top five and bottom five contributors in a given strategy, please contact FLI.

The names “First Long Island”, “FLI”, and all derivations thereof are the property of their respective owners and may not be used or copied without prior authorization. You acquire no rights or licenses to download, upload, post, transmit, publish, or distribute this presentation or any other material in any way that infringes or otherwise contravenes the rights of FLI or any third party, including any copyright, trademark, patent, rights of privacy or publicity or any other proprietary right.

In no event shall FLI be liable to any party for any damages, costs, fees, expenses, or losses of any kind in connection with any use of the contents of this presentation even if advised of the possibility of such damages.

3rd Quarter 2023 Letter to Investors

September 30th, 2023

September 30, 2023

“If there’s one thing that’s certain in business, it’s uncertainty.”

– Stephen Covey, Author, Educator and Businessperson

The third quarter ended with many of our strategies flat to somewhat down for the quarter despite a good start in July, which was washed away by seasonally poor September performance (September was a very rainy month in the Northeast to boot).  September is historically the weakest month of the year for equity markets (excluding dividends, the S&P 500 Index has been negative in September 56% of the time over the past 50 years).  However, equity performance measured by the S&P 500 Index for the more important year-to-date remains very positive with a gain of 13.1%, yet virtually all of that gain was driven by seven growth-oriented companies while the S&P 500 Equal Weighted Index is up 1.8%.  As a matter of fact, growth-oriented shares continued to trounce value-oriented shares for the year, with growth outperforming by 2,319 basis points. This pattern has been the case for most of this year although some broadening of the market occurred in the third quarter.

It is fair to say that greater uncertainty has developed as the year has progressed.  The following examples of uncertainty weighed on investors in this most recent quarter and will continue to do so:

1. Will the Fed continue to raise rates? How long will rates remain elevated?  When will higher rates impact both consumers and businesses?

2. When does the consumer run out of excess savings, accumulated from government stimulus during the COVID-19 pandemic?  Consumer credit card defaults are already on the rise.

3. 30-year mortgage rates hit a 20-year high at 7.3%, doubling from early 2022 levels.

4. The government just barely avoided a shut down as extreme conservatives demanded major budget cutbacks and more.  Last minute bipartisan bills in the House and Senate will defer the shutdown for 45 days, but what then?

5. The Russian war with Ukraine continues with no end in sight.

6. A cold war with China seems to be getting colder while China’s economy has slowed.

7. Oil prices are over $90 a barrel, making the cost of gasoline and heating oil taxing on consumers and businesses.

8. Labor strikes hitting automakers and Hollywood are modestly impacting the economy.

9. The kickoff of the presidential election cycle of 2024 is upon us with the two leading candidates facing multiple indictments or allegations of corruption.

10. Are we facing an imminent recession?  Is commercial real estate facing deep distress, especially in the office space market?  Will the recommencement of student loan payments slow our economy?

11. Domestic debt has hit $33 trillion dollars and projected annual deficits are high despite robust employment.

The above clearly sets the table for investor uncertainty and trepidation, however, the current economic facts and projections must be weighed against these uncertainties.  The following factors must be considered by investors:

1. The employment picture remains strong with unemployment at only 3.8% and the participation rate inching up.  This is a positive picture for now but could weaken in the future.

2. Inflation as measured by the PCE has fallen to 3.5% from 7.1% over the last 14 months.  This continues to follow tight monetary policy and falling M2, which suggests to us a continued decline in inflation in the future.

3. U.S. GDP growth for the third and fourth quarters are estimated at 3.8% and 0.3%, respectively.  This is a far cry from the recession predicted by many major banks (we did not project a recession would occur in 2023).

4. The government has passed three spending bills over the last two years (the CHIPS and Science Act; the Infrastructure Investment and Jobs Act; and the Inflation Reduction Act) that total $1.7 trillion, which will add to economic activity in the next few years.

5. Equity valuations for the cap-weighted S&P 500 Index as measured by the price-earnings ratio on 2024 projected earnings seem reasonable at 17.4x including the mega tech companies, and 13.9x earnings for the S&P 500 Equal Weighted Index.  Far from nose bleed when considering the current level of long-term interest rates.

6. Historically speaking, current interest rates are near the historical average despite spiking to a 15-year high.

7. The advent of artificial intelligence is upon us and will be disruptive while likely enhancing productivity.

Here are some charts to consider that shine a somewhat positive light on current and projected economic conditions.  These should be viewed with cautious optimism:

These charts demonstrate, based on current economic data and consensus estimates, that the economy remains relatively resilient and valuations are certainly reasonable.  This assumes no recession, however we believe that it could come later in 2024.  It also suggests that the numerous uncertainties listed earlier can be navigated as past uncertainties have been.  Earnings are projected to increase and inflation appears likely to continue to decline as liquidity is drained by the Fed.  Interest rates have normalized from post COVID-19 pandemic lows.  Finally, consumers are still in decent shape as higher wages, near full employment, and some excess savings remain available to consumers facing higher costs from food and energy.  It should not be overlooked that many homeowners locked in low mortgage rates in recent years (more than 62% of residential mortgages have an interest rate at 4% or less), and many corporate borrowers took advantage of historically low interest rates until the spike beginning a year ago.  This lessens the impact of higher current rates, which are just starting to be felt (in our opinion).

So What Do We Advise?

As our quote states, uncertainty has virtually always been a condition that investors and businesses have had to navigate.  We live with the fears of higher inflation and then escalating interest rates.  Our analysis suggests that we will continue to see tamer inflation.  The Fed will probably maintain rates higher for longer after possibly one more 25 basis point increase, but current rates are about average over history.  Stock market gains are achievable in an interest rate environment where the yield on the 10-year U.S. Treasury is greater than 4%.  As a matter of fact, the S&P 500 Index produced significant gains while the 10-year U.S. Treasury yielded more than 4%.  Of course, in our opinion, companies with growing earnings and increasing dividends are needed to drive that appreciation.

Meanwhile, as we navigate uncertainty, higher short-term yields near current levels are available for the first time in over 15 years.  This is a good place to hide out with excess monies, however, history demonstrates that cash is not the best wealth building asset class over the long term.  For now, it is a prudent asset allocation for a modest percentage of one’s liquid net worth and a greater allocation for investors more fearful of possible volatility from the long list of uncertainties spelled out earlier.  The amount to be held in short-term instruments (U.S. Treasury Bills, etc.) or modest duration bonds is an individual investment allocation decision.

Although value-oriented, including dividend-growing, equities have not been very rewarding thus far this year (our value strategies have appreciated 0% to 6% net*), they remain underappreciated in our opinion.  Growth-oriented companies might require patience from this point as they grow their future earnings into their higher valuations (these strategies have appreciated 3% to 13% net*). Real estate investments that are high yielding hold promise when well located, although not currently within the office market.

Final Thoughts

Having lived through a financial crisis (2008-2009), a once-in-a-hundred-year pandemic (2020-2022), and then 40-year high inflation (2022-2023) remedied by an unprecedented compressed rise in interest rates from about 0% leaves us with a continuing period of economic and investment digestion.  For investors, this can be an uncomfortable period.  The good news is that we have lived through uncertainties before.  Inflation, higher interest rates, possible recession, and domestic political uncertainty/dysfunction are conditions we have navigated and successfully overcome in the past, but patience is required!

An individualized asset allocation that weighs your risk tolerance and investment goals deployed among our investment strategies will get you through the current “wall of worry” and we stand ready to assist you.  Bottom line, we remain cautiously optimistic for the longer term while recognizing the near-term uncertainty and volatility.  Owning high-quality bonds; financially-strong companies, both growth- and value-oriented; and well-located real-estate-type investments over the long term will be the answer to the inevitable investor uncertainty.

Enjoy the Fall and upcoming holiday season.  Also, we hope to see you at our upcoming Thought Leadership Breakfast Seminar on November 8th discussing Long Island’s current and future economy.

Best regards,

Robert D. Rosenthal

Chairman, Chief Executive Officer,

and Chief Investment Officer

P.S.: As the horrific attacks by Hamas on Israeli citizens occurred after the date of this report (September 30, 2023), this report does not include any commentary on the impact of this atrocity and will be discussed in the future.

DISCLAIMERS

The views expressed herein are those of Robert D. Rosenthal or First Long Island Investors, LLC (“FLI”), are for informational purposes, and are based on facts, assumptions, and understandings as of October 26, 2023 (the “Publication Date”).  This information is subject to change at any time based on market and other conditions.  This communication is not an offer to sell any securities or a solicitation of an offer to purchase or sell any security and should not be construed as such.  References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. 

This communication may not be reproduced, distributed, or transmitted, in whole or in part, by any means, without written permission from FLI.

All performance data presented throughout this communication is net of fees, expenses, and incentive allocations through or as of September 30, 2023, as the case may be, unless otherwise noted.  Past performance of FLI and its affiliates, including any strategies or funds mentioned herein, is not indicative of future results.  Any forecasts included in this communication are based on the reasonable beliefs of Mr. Rosenthal or FLI as of the Publication Date and are not a guarantee of future performance.  This communication may contain forward-looking statements, including observations about markets and industry and regulatory trends.  Forward-looking statements may be identified by, among other things, the use of words such as “expects,” “anticipates,” “believes,” or “estimates,” or the negatives of these terms, and similar expressions.  Forward-looking statements reflect the views of the author as of the Publication Date with respect to possible future events.  Actual results may differ materially. 

FLI believes the information contained herein to be reliable as of the Publication Date but does not warrant its accuracy or completeness.  This communication is subject to modification, change, or supplement without prior notice to you.  Some of the data presented in and relied upon in this document are based upon data and information provided by unaffiliated third-parties and is subject to change without notice.

NO ASSURANCE CAN BE MADE THAT PROFITS WILL BE ACHIEVED OR THAT SUBSTANTIAL LOSSES WILL NOT BE INCURRED.

Copyright © 2023 by First Long Island Investors, LLC.  All rights reserved.

2nd Quarter 2023 Letter to Investors

June 30th, 2023

June 30, 2023

“You must force yourself to consider opposing arguments.  Especially when they challenge your best loved ideas.”

– Charlie Munger

The second quarter and first half of the year, from an investment standpoint, offered many challenges, but resulted in bifurcated yet positive results.  More growth-oriented companies saw a decisive comeback from last year’s challenges.  More value-oriented companies witnessed moderate gains after outperforming on a relative basis last year.  Stock market indices gained for the quarter and year-to-date, but the results of most companies varied significantly from the outsized gains of a very small number of growth companies.  As discussed below, the S&P 500 Index, on its face, can be a misleading indicator of the market’s overall performance.

The S&P 500 Index has in some cases been renamed the S&P 493.  On a traditional market-cap-weighted basis, the popular average gained 16.9%, while on an equal-weighted basis, the average gained only 7.0%.  The seven largest companies, on average, gained 89%, while last year they lost 46%, on average.  Using valuation as a significant metric to consider, the S&P 500 Index is trading at a price-earnings ratio of 18.2x on projected 2024 earnings, while on an equal weighted basis, it is trading at a price-earnings ratio of 14.3x on projected 2024 earnings.  Certainly, the equal-weighted price-earnings ratio on projected 2024 earnings is not alarming and, if anything, appears attractive.  Of course, that is with companies all equally weighted and dulls the effect of the seven companies leading the appreciation charge this year.  Please remember, these are estimated price-earnings multiples based on projected 2024 earnings, which do not reflect the effect of a potential recession as of this date.

The cause of this strange performance bifurcation was the unprecedented spike in interest rates driven by the Fed over the past 16 months, in our humble opinion.  Never in modern U.S. history have rates risen from near 0% to 5.25% in that short of a period.  This crushed growth stocks (think Amazon.com, which declined 50% last year), with the Russell 1000 Growth Index dropping 29.1%, only to rebound thus far this year by 29.0% (with Amazon.com rising by 55% year-to-date).  Meanwhile, value-oriented companies held up better than growth stocks last year with the Russell 1000 Value Index being down 7.5% (think Johnson & Johnson, which last year appreciated by 6%), while this year the index is up a modest 5.1% (with Johnson & Johnson down a modest 5%).  So far, in our opinion, our strategy at FLI of having our clients maintain a prudently diversified asset allocation that includes both value and growth stocks has led to some happiness for virtually all of our clients.

To give you some more specifics, here is a list of the seven S&P 500 Index companies leading the charge thus far this year versus how they fared in 2022: (We do not claim to have owned all of these companies but we do currently own the majority of them in a number of our strategies):

A Chart of Q2, YTD, 2022 Returns

The above results demonstrate the crushing effect, in our opinion, that the spike in interest rates and supply chain disruptions had in 2022.  It also portrays how the recovery stems from what most believe is the near end of interest rate increases, declining inflation, and the momentum caused by the recent focus on potential disruptive technology, particularly artificial intelligence (AI).  If your portfolios contained these seven companies, you most likely have enjoyed huge gains.  Of course, most portfolios are diversified and may own most of these seven companies (aggressive growth), some of these companies (growth-oriented strategies including core portfolios), or perhaps none of these companies if you are exposed to a highly value-oriented portfolio, which is likely in the last case as most of these companies pay no dividends or tiny ones that are not typical of value-type companies.

To boot, since I mentioned dividends, dividend paying stocks did not fare so well versus non-dividend-paying stocks for the first six months of this year as evidenced by the below chart.  As you know, we offer a dividend growth strategy that has compounded at over 10% net* a year since its inception over 13 years ago, where an above-average dividend yield and dividend growth are paramount.

S&P 500 Dividends Payers Relative to Non-Payers (Indexed to 100, 1/1/2015)

Our more growth-oriented strategies had a strong second quarter and year-to-date (gains of 7% to 18% net*) while our value-oriented strategies (both spanning our defensive and traditional baskets) had more modest gains (2% to 9% net*).  The mix of both growth-oriented and value-oriented strategies has led to a good rebound from last year thus far for virtually all of our clients.

At the same time, our advice from March to have a buffer of short-term U.S. Treasury Bills to help weather the uncertainties we are facing (the proverbial “Wall of Worry”) has led to client’s earning current annualized yields of approximately 5% or more.  Not so bad after U.S. Treasury Bills had yielded virtually nothing for many years and the 10-year U.S. Treasury was actually down 17.8% last year.

So, What Gives?

The referenced “Wall of Worry” consists of the following questions (that we know of), which are challenging and give us cause for pause and reflection:

· When will the Fed stop raising interest rates, and for how long will they remain elevated?

· Will inflation continue to abate?

· Will the recommencement of student loan repayments have a material effect on consumer spending?

· Is there a recession on the immediate horizon?

· If so, will the recession be a deep one?

· Will the geopolitical picture worsen?

· Will the political divisions plaguing our country get better or deteriorate even further?

· When will normality return from the COVID-19 hangover?

In answering the above, let us start with our view on interest rate increases and inflation.  The following chart, which we have referenced in the past, shows that negative trending monetary growth is typically followed by a decline in inflation:

M2 Money Growth & CPI

As you can see, as monetary growth declines, inflation typically follows within 16 months or so.  Currently, we have negative monetary growth, which has not occurred since the Great Depression (except for one month of de minimis negative growth in 1958).  In our opinion, this should lead to, and already is leading to, a decline in inflation, which should give the Fed the ability to pause its interest rate increases by the end of this year when we expect inflation to be in the 3% to 4% range or possibly even lower.  This should be good for the equity markets, including both growth and value stocks.  We could also see a broadening of performance within the S&P 500 Index, where quality value stocks make up some ground on growth stocks, which seem to have, in certain cases, somewhat stretched valuations, in our opinion.  An improvement in the performance of value stocks would be healthy for diversified investors.

However, slowing inflation and declining monetary growth should also slow our economy.  In a perfect world, maybe recession is avoided.  In our view, it is inevitable and we hope it does not impact us as investors until sometime in 2024.  The counter view to an imminent recession is stubbornly strong employment, despite these rate increases and quantitative tightening (shrinking of the Fed balance sheet).  Renewed economic growth in China and federal spending prior to the 2024 presidential election cycle could also fend off recession.  However, a war raging in Ukraine, a cold war with China, and certain Middle Eastern countries seemingly getting friendlier with the Communist Chinese also could contribute to what may be an inevitable recession and declining corporate profits, in our opinion.

In any event, we believe that a recession will be modest because of robust employment, even if that worsens somewhat, along with strong balance sheets for most companies including our major banks, which just passed a somewhat more stringent stress test.  We are still keeping a careful eye on commercial real estate, particularly office buildings, where declines in value have occurred because of higher interest rates and the decline in office occupancy from the relatively recent phenomenon of “remote working” stemming from the COVID-19 pandemic.  Additionally, geopolitical instability is something we must become more accustomed to.  A near coup in Russia and a cold war brewing with China gives us pause and cause for concern.  The resulting need for an even stronger U.S. military to counter these geopolitical stresses will also cause budget woes as our government must eventually deal with our growing debt and the cost of carrying that debt.  Certainly, this will be an issue in the upcoming 2024 presidential election cycle along with many other economic and social issues.

Our Challenge: Invest for the long term in quality equities and real estate or hide out in cash?

When times are fearful as now, it is typically a good time to invest for the patient long-term investor. U.S. Treasury Bill yields will ultimately come down, in our opinion, likely sometime over the next year or so.  Over the long term, cash or short-term liquid investments (other than maintaining a prudent buffer) have been a relatively poor returning asset class despite feeling attractive at this time.

Compounding returns of the S&P 500 to Cash (Starting with $1,000,000 on 12/13/1997)

In spite of dividend paying stocks only moving modestly higher thus far this year, over the long run we believe dividends will contribute to meaningful appreciation as they have historically.  We still believe in this beloved concept that requires patience but has rewarded investors over the long term:

Dividend Contribution to Total Return

A poor 2022 and a current “Wall of Worry” can make us challenge our own long-term assumptions about investing.  But with any thought and reflection, common sense investing still means having a prudently diversified asset allocation among quality bonds and mostly companies generating earnings growth, free cash flow, and returning cash to shareholders through dividends and buybacks, all while utilizing a valuation filter.  This should be our compass. The same goes for real-estate-type investments, where location and cash flow will reward investors.  Of course, everyone’s asset allocation must reflect their individual life circumstances and the advice of trusted professionals like the investment team at First Long Island Investors.

So, our long-held ideas mentioned in the preceding sentences still resonate with us.  Yesterday was the internet and today we look to the prospects of AI and blockchain being disruptive opportunities.  We might have to be patient, absorb some volatility, and look over the valley of periodic investment setbacks.  Wealth compounding is a long-term proposition.  Wealth growth above inflation requires some measured risk taking.  We believe that FLI is up to the task of navigating these uncertain waters.  Having faced difficult investment environments over the past 40 years (FLI is celebrating its 40th anniversary this year), gives us confidence in our ability to sail these challenging investment waters. As we have often quoted Warren Buffett, “never bet against America”!

Please do not hesitate to contact anyone on our investment and wealth management teams should you need assistance or guidance in your wealth and money management needs.

Have a wonderful summer!

Best regards,

Robert D. Rosenthal

Chairman, Chief Executive Officer,

and Chief Investment Officer

DISCLAIMER

The views expressed herein are those of Robert D. Rosenthal or First Long Island Investors, LLC (“FLI”), are for informational purposes, and are based on facts, assumptions, and understandings as of July 26, 2023 (the “Publication Date”).  This information is subject to change at any time based on market and other conditions.  This communication is not an offer to sell any securities or a solicitation of an offer to purchase or sell any security and should not be construed as such.  References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. 

This communication may not be reproduced, distributed, or transmitted, in whole or in part, by any means, without written permission from FLI.

All performance data presented throughout this communication is net of fees, expenses, and incentive allocations through or as of June 30, 2023, as the case may be, unless otherwise noted.  Past performance of FLI and its affiliates, including any strategies or funds mentioned herein, is not indicative of future results.  Any forecasts included in this communication are based on the reasonable beliefs of Mr. Rosenthal or FLI as of the Publication Date and are not a guarantee of future performance.  This communication may contain forward-looking statements, including observations about markets and industry and regulatory trends.  Forward-looking statements may be identified by, among other things, the use of words such as “expects,” “anticipates,” “believes,” or “estimates,” or the negatives of these terms, and similar expressions.  Forward-looking statements reflect the views of the author as of the Publication Date with respect to possible future events.  Actual results may differ materially. 

FLI believes the information contained herein to be reliable as of the Publication Date but does not warrant its accuracy or completeness.  This communication is subject to modification, change, or supplement without prior notice to you.  Some of the data presented in and relied upon in this document are based upon data and information provided by unaffiliated third-parties and is subject to change without notice.

NO ASSURANCE CAN BE MADE THAT PROFITS WILL BE ACHIEVED OR THAT SUBSTANTIAL LOSSES WILL NOT BE INCURRED.

Copyright © 2023 by First Long Island Investors, LLC.  All rights reserved.

1st Quarter 2023 Letter to Investors

March 31st, 2023

March 31, 2023

“Out of intense complexities intense simplicities emerge.”

– Winston Churchill

The first quarter of 2023 was highlighted by positive results for the major indices despite significant volatility and what we will call, at this point, a mini banking crisis.  This crisis, in our opinion, was brought on by the meteoric rise in interest rates over the past twelve months and resulted in a depositor run on two regional banks that led to their closure; the forced acquisition of Credit Suisse by its neighbor UBS; and the closure of a smaller bank brought on by its exposure to cryptocurrency.  To say the least, this first quarter compressed good news, bad news, uncertainty, continuation of a war, and the coming together of a new potential axis of evil (Russia, China, and Iran).

S&P 500 Total Return -  Q1 2023

After a terrible 2022, equity markets started strongly in January only to be derailed in February by stronger (worse) than expected inflation news; strident rhetoric by the Fed along with two 25 basis point interest rate increases; fears of a recession; and then the unthinkable closing of both Silicon Valley Bank and Signature Bank.  The following chart depicts the gyrations in Q1 for the S&P 500:

At the same time, while this dreary set of financial events occurred, many investors sought cover in U.S. Treasury Bills, Notes, and Bonds where short-term yields even reached a bit above 5% for a period of time.  Short-term yields reached the highest levels in over a decade and turned out to be a very attractive asset class to hide out in.  The following chart shows the significant outflow of funds from bank deposits, much of which found its way to U.S. Treasuries and money market funds:

Weekly Change in Commercial Bank Deposits ($BN)

What came into focus was the lack of deposit insurance above the FDIC limit ($250,000 for individuals as an example).  Despite the overall strength of our banking system, as evidenced by last summer’s stress test of the 34 largest banks, panic and fear started to prevail.  This impacted the stocks of all banks but in particular, regional and super-regional banks.  Meanwhile, growth shares outperformed value-oriented stocks in an about-face from last year when growth shares were trounced as an asset class category.  The concerns about the strength of our banking system led many investors to believe that the Fed would be forced to cut rates to stem this banking crisis, which brought back the horrible memories of the Global Financial Crisis of 2008/2009.  Treasury Secretary Janet Yellen, after consultation with other government officials, stepped in with an FDIC plan to insure all deposits above the FDIC threshold for these two regional banks.  At the same time, a number of large banks stepped in with thirty billion dollars of temporary deposits to bolster another bank facing massive outflows, First Republic Bank.  Secretary Yellen has been unclear as to whether this guaranty of all deposits above FDIC limits will be available should any other banks fail.

As of this writing, it appears that this mini bank crisis has been contained.  The trouble caused by rapidly rising interest rates, combined with some banks mismanaging their balance sheets by purchasing long-dated U.S. Treasuries while paying depositors paltry interest rates, however, has not gone away.  This situation could result in more restrictive lending policies as banks try to manage the temporary paper losses they have from long-dated bonds purchased during a much lower interest rate environment.  To help minimize this mini bank crisis and in addition to the Fed affording banks the opportunity to avail themselves of using the Federal Reserve discount window, the Fed introduced a new program called the Bank Term Funding Program where banks can borrow at face value against the U.S. Treasuries, agency debt, and mortgage-backed securities they own, many of which are underwater (a scary picture in the chart on the top of the next page).  The government infused about $300 billion into the financial system in the last weeks of the quarter.

Discount Window Lending ($Bn)

The cost of insulating depositors from this crisis will probably be borne by other banks through increased fees, as was the case after the 2008/2009 Global Financial Crisis.  Another factor to be watched is the impact this will all have on commercial real estate.  Rates to refinance have more than doubled, and cash flow for real estate borrowers in some cases has declined as utilization of office space has remained poor post the COVID-19 pandemic.  Another crisis could emerge and must be watched carefully while banks will likely increase loan loss reserves in anticipation of this problem. 

On the brighter side, towards the very end of the quarter, inflation started to moderate once again.  This is key to the future path of interest rates and will guide the Fed’s interest rate policy.  It was also reflected in the bond market with weaker short-term yields, at least for now.  The chart below shows how shorter-term rates rose during the quarter, only to fall as the mini banking crisis emerged and the quarter came to an end.  With the decrease in short-term rates, equity markets (and in particular, the growth-oriented NASDAQ Composite) rallied.

Key US Trasury Benchmark Yields - Q1 2023

It is our view that in the very short term, interest rates will fluctuate with monthly data on inflation as well as if there are any additional bank closures.  It is well known that economic activity will be impacted by the past rise in interest rates with a delay of anywhere from six months to a year.  As a result, economic activity, including employment, should moderate in the near future if not eventually lead to what we believe will be a modest recession.  This should reduce inflation and, at the least, cause the Fed to stop increasing interest rates and possibly lead to rate cuts (we believe the Fed will pause at this point).  This is likely to be good for the equity markets and ease pressure on commercial real estate.

M2 Money Growth & CPI

The chart above is one that we believe demonstrates that the growth in money supply (M2) has been a reliable forecaster, with a lag, of inflation as measured by the CPI.  The enormous monetary growth caused by the government stimulus in response to the COVID-19 pandemic resulted in a large spike in inflation.  Now that the stimulus programs have ended, M2 growth has collapsed.  We are optimistic that inflation will fall as M2 growth is now negative on an annual basis for the first time that I can remember or for that matter in history.

In our opinion, it appears that inflation will be tamed by the meteoric rise in interest rates; the improvement in supply chain issues; continued layoffs, especially in the tech sector, which should lessen wage inflation; and the reduced excess savings that consumers have at their disposal.

That leaves only two major issues for us as investors to be concerned with as we try to build on the improved equity market performance of the first quarter, those being earnings and the other being the alarming geopolitical situation.  As for earnings, the impact on banks’ results due to the confluence of cash sorting (moving from deposits to money market funds and U.S. Treasuries) and additional fees, as well as stricter regulations, will impact the industry’s profitability going forward.  A general slowdown in the economy caused by the ultimate impact of higher interest rates will also impact earnings for some companies.  Oil prices have declined since the beginning of the year, which should also reduce oil company profits.  Geopolitical factors (the growing closeness of Saudi Arabia and Iran) and the improvement in the Chinese economy, however, could bolster prices at some point.  Finally, the resilience of the consumer will be tested as their excess savings dwindle with government handouts to many having ended.  Thus, the earnings picture for the S&P 500 Index and many smaller companies will probably slow and could decline from 2022 levels this year.

S&P 500 Earnings

As earnings may turn down for some companies, it will be a stock pickers market.  We will, as always, look to companies with growing earnings, despite the economic slowdown, as well as companies that can continue to grow their cash dividends above inflation (dividend growth in 2022 was 11.8% on average for our Dividend Growth strategy and thus far is averaging 8.4% in 2023 with more than half the portfolio not yet scheduled to announce dividend increases).  The outside managers we work and counsel with remain steadfast in their belief that their portfolio companies will grow their earnings in 2023.  Should the Fed pause and inflation trend down, we believe those companies we invest in that can continue to prosper will be rewarded with higher share prices.  We also expect dividend growers that can outpace inflation to be rewarded as they have in the past.

Summary

To paraphrase our quote, significant complexity demands intense simplicities.  To us at FLI, simplicity is a prudent, diversified allocation to short- and medium-term, high-quality fixed income; a continued overweight to our defensive strategies (where we have concentrated exposure to both quality growth and value companies as well as certain hedged credit opportunities); and a continued allocation to traditional equities where high-quality, undervalued companies with consistently growing earnings will reward long-term investors seeking comfort in uncertain times.  We continue to underweight international exposure while also reducing our exposure to banks.  To us, the current risks overseas, as well as what legislative and regulatory burdens will impact banks is too hard to handicap, including the possible severity of commercial real estate problems (mainly office buildings).

We are pleased that the choppy and volatile first quarter ended in positive fashion, while U.S. Treasury Bonds (longer term) eked out a positive return after their worst year in over 90 years. Uncertainty and complexity remain, both economically and geopolitically.  We remain vigilant as we seek high-quality investments that are intensely simple solutions to the current complex investment environment.  We continue to have conviction in our four investment baskets over the long term.

We are proud to announce that Dylan Klein, Assistant Vice President—Private Wealth Management, has passed level three of the CFA® exam and is now a CFA® charterholder.

Please call upon us with any of your investment and wealth management needs.

Best regards,

Robert D. Rosenthal

Chairman, Chief Executive Officer,

and Chief Investment Officer

PS: It is premature to discuss the approaching 2024 election cycle, as well as the historic criminal indictment of a former President who is also an announced candidate for the Presidency in 2024 and ongoing investigations of the family of the current administration.  Both situations can and will likely add to volatility.  More to say in the future.

CFA® is a registered trademark owned by CFA Institute.

DISCLAIMER

The views expressed herein are those of Robert D. Rosenthal or First Long Island Investors, LLC (“FLI”), are for informational purposes, and are based on facts, assumptions, and understandings as of April 27, 2023 (the “Publication Date”).  This information is subject to change at any time based on market and other conditions.  This communication is not an offer to sell any securities or a solicitation of an offer to purchase or sell any security and should not be construed as such.  References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. 

This communication may not be reproduced, distributed, or transmitted, in whole or in part, by any means, without written permission from FLI.

All performance data presented throughout this communication is net of fees, expenses, and incentive allocations through or as of March 31, 2023, as the case may be, unless otherwise noted.  Past performance of FLI and its affiliates, including any strategies or funds mentioned herein, is not indicative of future results.  Any forecasts included in this communication are based on the reasonable beliefs of Mr. Rosenthal or FLI as of the Publication Date and are not a guarantee of future performance.  This communication may contain forward-looking statements, including observations about markets and industry and regulatory trends.  Forward-looking statements may be identified by, among other things, the use of words such as “expects,” “anticipates,” “believes,” or “estimates,” or the negatives of these terms, and similar expressions.  Forward-looking statements reflect the views of the author as of the Publication Date with respect to possible future events.  Actual results may differ materially. 

FLI believes the information contained herein to be reliable as of the Publication Date but does not warrant its accuracy or completeness.  This communication is subject to modification, change, or supplement without prior notice to you.  Some of the data presented in and relied upon in this document are based upon data and information provided by unaffiliated third-parties and is subject to change without notice.

NO ASSURANCE CAN BE MADE THAT PROFITS WILL BE ACHIEVED OR THAT SUBSTANTIAL LOSSES WILL NOT BE INCURRED.

Copyright © 2023 by First Long Island Investors, LLC.  All rights reserved.