“Be fearful when others are greedy, and greedy when others are fearful.”Warren Buffett
Welcome to the first issue of The Running Thesis. My name is John Woodard, an Investment Advisor at Woodard & Company Asset Management Group here in Bermuda Run, the firm founded more than four decades ago and where I work today alongside my father and the rest of our team. Where our quarterly letter carries the full, considered view of the Investment Committee, this monthly dispatch is written personally, though it draws just as much on the Committee’s thinking as it does my own. It is a shorter, more immediate read on what has actually moved in the markets and why, sent out in the weeks between those longer letters. Each issue opens with From the Desk, my read on the month just finished, moves through whatever themes deserve the room, and closes with On the Radar, a look ahead at what we are watching before the next issue reaches you. The final paragraph each month steps away from markets entirely, a small window into what I am up to outside the office, since I have always thought the two inform each other more than people assume. If anything here raises a question, send it to john3@wcamg.com, and I read everything that comes through. Thank you for reading, and for tuning in to something new.
From the Desk.
July belonged to the sellers, and nowhere more than in the chips that carried this market for the better part of two years. Semiconductors and memory names in particular took the worst of it, with the SOX (semiconductors ETF) down 20.6 percent and DRAM (memory chip ETF) pricing off a brutal 31.8 percent for the month, against a Nasdaq that fell 3.20 percent, an S&P 500 that closed essentially flat at negative 0.13 percent, and a Dow that actually finished the month higher, up 0.32 percent. Some of the early damage had less to do with conviction changing and more to do with the calendar. The first week of the month carried the fingerprints of second quarter unwind, positions trimmed and squared away rather than genuinely abandoned. What followed was a real rotation beneath the surface, and in some ways a healthier one than the headline numbers let on. None of it changes where we come down for the balance of the year. Below, what actually moved, what it means, and why we remain constructive heading into a seasonally noisier stretch.
The weakness in chips deserves a closer look, because the story underneath the index moves was more interesting than the headline decline. Energy led every sector by a wide margin, up better than 12 percent on the crude rally, with financials also strong. Information technology was the worst performing sector, down 3.5 percent, and industrials, utilities, and materials were also negative, though by smaller margins. Real estate, health care, consumer staples, consumer discretionary, and communication services all finished the month flat or higher, so the damage stayed fairly contained even if it reached beyond technology alone. What stood out to me most was how closely our semiconductor and memory names traded alongside South Korea’s KOSPI, which briefly became something of a ground zero for the broader AI unwind, with swings in SK Hynix and Samsung sharp enough to trigger multiple trading halts and draw regulatory attention. That correlation makes some sense once you remember that those same two memory chipmakers account for roughly half of that index’s total weight, but it was still notable watching the two markets move in near lockstep through the month. Underneath the surface weakness, breadth actually improved: the equal weighted S&P finished the month up 1.1 percent against an essentially flat cap-weighted index, a gap of roughly 120 basis points that extends a broadening trend worth watching, though the small cap Russell 2000 did not share in it, falling 3.08 percent, so this looks like a large cap story more than a small cap one so far. Capital did not so much leave equities as it moved to a different address within them, from growth into value, and from the most expensive corners of the index into the parts trading at a more reasonable multiple.
The Federal Reserve held its policy rate steady at 3.50 to 3.75 percent at the recent meeting, though the more interesting story is happening inside the room rather than in the announcement itself. Three officials dissented in favor of a hike, the clearest evidence yet of a committee where several governors are already leaning toward further tightening, and building consensus around a measured path looks like real work from here for Chair Warsh. What has stood out to me so far is less about where any single vote lands and more about his approach, letting markets do more of the talking and the Fed less of the leading, a real departure from recent years. That said, do not mistake his process for dovishness. His comments reaffirming the 2 percent inflation target as a mandate rather than a suggestion tell us the hawkish lean holds for now, and the data gives him room to hold that line: initial jobless claims came in at their lowest level since 1969, inflation readings have come in cooler than expected, and the labor market on the whole looks healthy by nearly every measure available. Looking further out, Warsh has been clear about wanting to shrink the size of the Federal Reserve’s balance sheet, an objective that a lower rate path would eventually make easier to pursue, so a hawkish next few months should not be mistaken for a change in the ultimate destination.
The conflict in Iran remained a live risk through the month rather than a one time event, with repeated strikes and counterstrikes between the United States and Iran, alongside Houthi attacks in the Red Sea, keeping shipping through the Strait of Hormuz and Bab el-Mandeb under a cloud for most of July. WTI crude told that story about as well as anything, gaining roughly 21 percent for the month, its best monthly gain since March and enough to erase June’s decline, before closing out July at $84.69 a barrel. Even after that rebound, the benchmark remains well short of the second quarter high near $110, reached in April at the worst of the fighting. What struck me most is how little equity markets reacted. The pattern so far has been escalation followed by de-escalation rather than a genuine supply shock, and investors appear to be pricing the conflict accordingly. If that changes, inflation is the obvious risk to watch, though we would not overweight that concern just yet. Oil has shown a repeated willingness to grind lower even while geopolitical risk stays elevated, and we do not think this cycle looks meaningfully different so far.
On the Radar.
Zoom out and the setup for the rest of the year looks reasonably clear to us. The third quarter is historically the slower stretch for equities, and this one carries the added weight of a midterm election year, a combination that has historically meant more chop between now and early October before conditions tend to improve. We would not be surprised to see that pattern hold this time as well. None of that changes our outlook for the balance of the year. Earnings have come in strong across the board, with the clear majority of companies beating estimates, and that is ultimately the kind of evidence that carries more weight with us than a few weeks of rotation. We remain bullish, and would treat further seasonal weakness between now and October as an opportunity to lean into that view rather than a reason to retreat from it.
Between now and the next issue, several things are on my desk. The back half of earnings season needs to confirm the beat rate holds, since that is the entire basis for staying constructive here. We are watching Jackson Hole closely this time rather than a rate decision. Jackson Hole is the Federal Reserve’s annual policy symposium, essentially the closest thing to a Fed meeting outside the formal calendar, where central bankers from around the world gather each August in Wyoming, well ahead of the committee’s next formal vote in September. No decision gets made there, but it is where Chair Warsh has the platform to signal his thinking, and with markets already pricing roughly a 65 percent chance of a hike in September after this month’s three dissents, whatever he does or does not say there is likely to move that number. We will be watching just as closely for whether he continues to let markets set the tone rather than trying to lead them himself, and whether the more hawkish members of the committee keep gaining ground in his absence of forward guidance. The jobs reports get equal attention, since the entire case for patience rests on a labor market that continues to hold up as well as it has. On the Middle East, the tenor has genuinely shifted. We seem to be getting closer to a real peace with each passing week, though Iran has not shown much willingness to actually sign onto a deal, even as time increasingly works against them. We are watching that trajectory as closely as anything on this list, along with whether WTI settles into a range or reignites in response, and whether either shows up in the inflation data with any real lag. Closer to home, we are watching whether the rotation into equal weighted strength has genuine staying power or fades once the technology and semiconductor names find their footing again, since that will tell us a great deal about how healthy this market actually is underneath the surface.
On a personal note, September opens with a race of my own making. I am hosting a backyard ultra at the very start of the month, a last runner standing format built around a four mile loop that the entire field runs every hour, on the hour, until only one competitor is left moving. From there the calendar turns serious, and training is already ramping up in earnest, with the Cape Fear Marathon in October and a full Ironman in Panama City to follow in November. More on both fronts as they get closer.
Before I close, a word from the other side of the microphone. I host The Generational Investors® podcast here at the firm, and last week’s episode sat me down with my father, John B. Woodard Jr., President of Woodard & Company, for a full recap of our second quarter, two generations comparing notes on what the numbers actually meant. I think you will enjoy it, whether you are a longtime listener or discovering the show for the first time. Find it wherever you watch or listen to podcasts.
Yours in confidence,
John Bennett Woodard IIIInvestment Advisor Representative
Always Buy Quality and Diversify®