A Decade of Growth has Changed the Economy

To Our Investors and Friends,

The S&P 500 increased 2.0% in the month of October, heavily influenced by a handful of mega cap stocks including Apple (+11.1%) and Facebook (+7.6%). This continues a trend that has been in place for the last decade. Oil prices (WTI) remained flat at $54 a barrel. The10-year remained within a fairly tight range, closing 1bp higher for the month to 1.69%, while the spread between the 2 and 10-year widened to a more recent norm of 17 bps. The Russell 1000 Growth continued to lead the market, up 2.8%, driven by large cap tech noted above. The Russell 2000 Growth was up about 2.4% as semis rebounded strongly. The Russell 2000 Value returned a similar 2.4% driven by utilities, REITS, and financials. The Russell 1000 Value rebounded the least, up a less robust 1.4%.

We are struck by how much the economy has changed over the last decade. Since the end of the financial crisis, the youngest companies in the S&P 500, many harnessing the power of intelligent tools of the fourth industrial revolution, have grown from a mere .6% of GDP to over 3%. As indicated in the chart below, more mature companies like Microsoft and Apple (which drove the gains in the market this month), have helped the 26 to 50-year old cohort of companies grow from approximately 5% of GDP to approximately 8% of GDP. Over this same period, companies over 100 years old (many financials and the leaders of the second industrial revolution), are losing their economic relevance within the economy. According to our analysis of S&P 500 members, these companies have seen their contribution to GDP fall from 27% to 22% since the financial crisis.  

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We believe that the economic trends that have been in place for the last decade remain firm, and will only expand from here. We believe that the stock market has only begun to recognize the changes brought about by digitization of the economy, and that these young growth companies can become considerably larger. We will continue our efforts to invest in the beneficiaries of the Fourth Industrial Revolution, those companies that we believe can become the country’s next generation blue chip companies. This group can be volatile at times, as has been demonstrated in the last few months, but should drive meaningful returns over time. We welcome you to join us on this journey of discovery.

All the Best to You,

AKW