CIO Mid-year Review: Market Highs, Uncertainties & Opportunities

Dear Hennessy Funds Shareholder:

As I write this semi-annual letter, the three major market indexes have hit all-time highs. We are enjoying robust returns in the U.S. across all sectors and several asset classes. We also understand that markets are driven by optimism. As markets hover at or near record highs, often uncertainty, risk, and volatility creep in. Have we gone too far, too fast? Is the market overvalued? What if the unexpected happens and sentiment turns in the other direction? There will always be uncertainties and unknowns, and that is why we remain steadfast in sticking to a consistent and focused investment style through every part of a market cycle, which we believe will perform well over the long term. 

Given the unpredictable nature of the stock market, we encourage a sensible approach to investing. We can consider certain well-known adages and try to prove them, in exact terms, but we may find that there is no silver bullet in investing. “Sell in May and stay away.” “The trend is your friend.” “Expect increased volatility before a presidential election, followed by an up market through year end.” These tips for investing can be based on statistical correlations, some stronger and some weaker, but none are correct all the time. In investing, we want to avoid following pseudo-rules that are not always true; “60% of the time, it works every time” is not strong enough. All this to say, investing is full of risks, the market is full of uncertainties, and investors should be wary of investing silver bullets.

At Hennessy, we understand the uncertainty inherent in all investing, but we also understand that without uncertainty, there would not be opportunity. Our portfolio managers (PMs) have many years of experience (over 26 years average for all our PMs combined), and each of them apply their experience to investing for the long term to attempt to mitigate risk. Investors can mitigate risk in their own portfolios as well, by staying diversified, avoiding highly speculative investments, not chasing performance, not trying to time the market, and staying invested over longer periods. Most important of all, though, is having realistic expectations for your own level of risk tolerance. 

While uncertainty and opportunities persist in any market, the past six-month period has been an overall positive period for many investors and for the stock market overall. For the six months ended April 30, 2024, all three broad based indexes were positive with the Dow Jones Industrial Average up 15.58%, the S&P 500® Index up 20.98%, and the Nasdaq Composite Index up 22.31%. Robust performance was broad based. In fact, the dispersion of returns was relatively low across all market cap sizes and all GICS sectors, with the highest being Financials (+25.92% for the S&P 500® Financials Sector Index) and the lowest being Real Estate (+11.24% for the S&P 500® Real Estate Sector Index). 

Several factors contributed to the strong, broad-based returns in the market. We believe the two most important of those factors were continued signs of a strong economy and solid corporate earnings. Although the market does not expect more than one or two rate decreases in 2024, fear of a recession due to the Federal Reserve’s rate hiking cycle seems to have abated slightly. Consumer demand and spending remain resilient, wages continue to increase, and unemployment numbers remain historically low. For most of the period, inflation expectations remained relatively low, although data in the later part of the period was somewhat higher than anticipated.

Like the overall market, our funds experienced strong results. All 17 of our funds posted positive returns during the six months ended April 30, 2024. Given that growth outperformed value and that many of our funds are value oriented, only seven Hennessy Funds outperformed their primary benchmarks. However, we continue to focus on providing attractive returns for our shareholders over a complete market cycle, and we are pleased that all but five of our funds have posted positive returns over the one-, three-, five-, and ten-year periods ended April 30, 2024, with the remaining five funds posting positive returns over only the one-, five-, and ten-year (but not three-year) periods ended April 30, 2024.

We believe that the outlook for U.S. stocks remains positive, primarily because we believe that the Federal Reserve will eventually begin to lower interest rates. Despite the recent up-tick, inflation has shown signs of easing, creating a better environment for consumers as well as businesses. The unemployment rate is still near record lows, there are elevated levels of cash on the balance sheets of U.S. companies and in the pockets of many consumers and investors, and there is the prospect of a more dovish Federal Reserve heading into the second half of 2024. However, we are cautiously watching certain parts of the economy for any hints of weakness, including consumer spending and credit issues. While volatility and uncertainty may affect the markets, we encourage investors to keep a long term perspective and maintain a diversified portfolio. 

We thank you for your continued interest in the Hennessy Funds and are grateful that you have chosen to invest with us. If you have any questions or would like to speak with us directly, please call us at (800) 966-4354. 

Best regards,