January 1, 2023
“This Too Shall Pass”
Dear Fellow Shareholders,
I am pleased to report a successful 4th quarter result in what was a difficult period for financial markets, with the S&P 500 Index off 20% and the Nasdaq off 33% for the calendar year. In addition, bond indexes exhibited their worst results in the last 50 years! The fund was not immune but was able to close the year with a 4.96% return in the fourth calendar quarter to finish 2022 with a return of -12.28%.
The bond market had carnage inflicted on it by the rapid increase in rates, courtesy of the Federal Reserve, and offered negative returns of 12-15% in 2022. There is now a much more compelling reason to invest in the bond market today as risk-free Treasuries as short as a 6 month maturity offer roughly 4.5%. I would argue that this is still less than the most recent reading of inflation at 6.5%, providing a negative “real return” of -2%, but a compelling offer compared to what has been non-existent returns for cash for years.
I have to believe that – after a year when some larger and better known “balanced” funds were off 18-19% – that we are closer to the end than the beginning of market volatility. As I mentioned in the paragraph above, there is now the opportunity to earn 4-5% on cash reserves and low double digit returns in the corporate bond markets. Many of these opportunities were not present this time last year.
In the 4th calendar quarter of 2022, the markets rallied strongly off favorable news on slowing inflation numbers in mid-October. Equity indices did fall in December but I think much of it was driven by year- end tax loss selling, leading the subsequent rally we have seen in prices since the New Year. Many indicators we look at show that the worst of the year-over-year inflation numbers may be behind us at this point.
The Federal Reserve is scheduled to meet in early February and at this point the market anticipates a smaller increase in the Fed Funds rate than the more recent ones.
Once again, we at Intrepid Capital will be on the look-out for where there might be a disconnect between “price” and “value,” particularly around some of the upcoming announcements from the Federal Reserve and governmental release of inflation numbers, which can cause sharp swings in the prices of both stocks and bonds.
Thank you for your continued support. If there is anything we can do to serve you better, please don’t hesitate to call.
Thank you for your investment.
Mark F. Travis, President
Intrepid Income Fund Co-Portfolio Manager