Curious Tails

We are at the end of another year. For me, if anything, 2023 reinforced that patience is undeniably a virtue in investing. We saw patience vindicated for anyone who kept the faith in equities in 2023.  

Pet Tales

The pandemic years of 2020 and 2021 were boom years for the U.S. pet industry, with sales up about 10%-13%. During 2022, however, the market’s 9% growth was largely a function of inflation. Although the economic headwinds cooled sales in some of the more discretionary categories, the industry overall has fared well vis-à-vis other consumer markets. In Packaged Facts’ Surveys of Pet Owners, pet products and services are at the bottom of the list of household spending cutbacks, second only to human medicine and healthcare. Reflecting both higher prices and Americans’ deep commitments to their pets, pet parents remain tenacious when it comes to pet care, with 68% spending more in February 2023 than January 2022, even as they looked for ways to economize overall. 

Growth in pet care is primarily driven by an increase in spending on pet-related healthcare — including veterinary care, diagnostics and pharmaceuticals — that has resulted in longer pet lifespans that require more expensive elderly pet care, according to Bloomberg Intelligence’s Pet Economy Report. This advancement and prioritization of elderly pet care may in turn lead to an increase of the U.S. pet population by 13%. Other emerging markets may see outsized growth due to the increase in nuclear families in urban areas, single-person households, and a rise in per capita disposable income.  

A couple of other notable events and trends in the economy are: 

• Two bills were introduced this month that could upend the U.S. housing market. One would bar hedge funds from owning single-family homes, forcing them to sell off their huge portfolios within a decade. The other would place an annual fee of $10K/home on owners of 75+ single-family properties. If passed, the bills could help rein in prices by putting thousands of fund-owned homes on the market. FYI: most Americans believe that now is the worst time ever to buy a house. 

• Private credit. Lending offered by non-banking institutions and investors is at $1.5 trillion today, up from $200 billion in 2000. As new Basel 3 capital requirements are set to begin next year, banks like JP Morgan and Citizen Financial are looking to partner with private lenders playing the unusual role of an intermediary. 

2024 Opportunities 

The rate of economic growth began slowing in the fourth quarter of 2023 and is expected to continue slowing until bottoming out in the third quarter of 2024. Bond yields have increased materially, improving their attractiveness compared to other assets and for portfolio risk management more generally. 

Financial services, a cyclical value-leaning sector, leaps out as inexpensive with low expectations. Rising rates and the 2023 U.S. banking crisis led the sector to underperform. Much of the risk here has been discounted and some U.S. banks are now attractive. 

Utility stocks was the worst-performing sector in 2023. According to Morningstar analysts, the sector’s future growth and attractive dividends stem from taking advantage of renewable energy, rising electricity demand and newly funded hydrogen hubs. During the next two years, more U.S. utilities are expected to raise their dividends than at any time in at least the last 30 years. 

As pet owners turn to online retailers for selection, convenience and price, one of the leaders in the pet direct-to-consumer space is the pet supply ecommerce brand Chewy.com. Nestle is also a major player in this market, and Amazon is also looking to tap into the growing pet product trend. Having watched the growing number of pet parents around my home, and their obsessive levels of guardianship, I wouldn’t be shocked if I see something like this in the future:

I wish you and your loved ones a happy New Year, and a year of good health and good investing.