The relatively low-volume summer gave way to greater volatility in the month of September. September is historically a weaker month for US equity markets, and this September was no exception.
Key issues such as an exhausted global supply-chain and a semiconductor shortage have been hindering global growth for months. This, coupled with dangerous debt ceiling discussions in Washington, created a 5% sell-off in US equity markets in what is typically a weak month. Markets quickly bottomed, however, as Republicans granted a debt ceiling extension in early October. Simultaneously, markets began digesting hot inflation reports and corresponding moves in treasury markets.
Inflation has been a top-of-mind concern for our investment team for the majority of 2021. Negative real interest rates, fiscal stimulus, and a dovish Fed has fostered an inflationary environment for months. Interest rate markets were hesitant to move on inflation as many Fed officials claimed that it would be transitory. This narrative slowly began to change as prices on many consumer essentials, such as food and energy, increased at rates we have not seen in a decade.
Equity assets can be a great insulator against inflationary pressures. As discussed in our last letter, our team has positioned our portfolio into companies that can either take advantage of inflation or pass on inflationary forces to customers. Companies like JBHT have taken advantage of inflation in the trucking segment for months due to successful cost management.
Our investment committee built a sizable position in the largest energy sector ETF throughout the summer months to take advantage of inflation in a segment that typically sees inflation before others. The recent move in energy prices resulted in the XLE appreciating nearly 30% because of wider industry margins due to escalating commodity prices. We have recently reduced this position to take profits after significant appreciation.
There are also companies that perform better in inflationary environments because of what happens to interest rates. As inflation continues to be a problem, the Fed will have to raise interest rates to cool down the economy. Investors are less likely to flock to growth companies that are priced to earn money in the future and instead prefer stocks that earn money today.
Our largest holding today is GS because of its extremely low valuation. With a PE of less than seven while trading slightly above book value, our investment team believes this stock can perform well as interest rates continue to rise due to its earnings power today.
Earlier this year our team took positions in rail and on-road freight companies due to our knowledge of freight price increases from the private companies our investment committee operates. While not all earnings have been reported across the market, JBHT and UNP have seen healthy price appreciation in line with what our team had predicted in Q1. We expect to see continued price appreciation while the supply chain system slowly catches up with demand over the next 6 months.
As we look into the final months of the year, our investment team remains positive on US equity markets. September and October are traditionally weak months in equity markets while November and December have historically been stronger. Seasonal strength, coupled with low interest rates, strong consumer confidence, and recent underperformance of the largest market weights is leading to a strong set up into year-end.
Our current portfolio likely will not change much going into year-end as we are positioned to continue taking advantage of higher inflation and supply-chain struggles. Remaining in companies that have pricing power, strong balance sheets, and deep entrenchment within their industries is of extreme importance in this economic environment. We believe every position in our portfolio demonstrates these characteristics and can perform well in a variety of different environments.