To Our Investors and Friends,
The S&P 500 fell 1.8% in the month of August, off a record high in July. Oil prices (WTI) dropped 6% to $55 a barrel as global growth slows, and supply remains robust. The most significant change in the markets came from the bond market, where the yield curve continued to fall. The 10-year govt bond dropped to 1.5% from 2.1% one month ago. We believe this is being driven by pressures on rates throughout the globe, driven in part by a slowing economy worldwide. One meaningful example, the German 10-year, dropped to negative .7% from negative .4% a month ago. In the US, the spread between the 2- and 10-year is now essentially 0.0%. This is a very bad scenario for bank profits, but has not caused a lack of credit availability, and therefore may not be a precursor to a recession. The Russell 1000 Growth index fell 0.8% and the Russell 2000 Growth index fell 4.3% in the month, both continuing to beat the bank heavy Value indexes by approximately 2% and 1% respectively.
Globalization, aging demographics across the world, and a changing economy driven by the introduction of new ways of communicating and transacting are all playing a part in influencing global markets. All markets will eventually reflect the new economic realities driven by these forces. Volatility in markets is being influenced by another major change… technology is reshaping both the participants in markets and how markets are correlated worldwide.
After the financial crisis, financial institutions began to dramatically reduce their ranks. Algorithms first assisted and then replaced thousands of human traders at an unprecedented rate, and continues at a rapid pace more than 10 years after the financial crisis ended. These new computer programs are vastly simpler than their human counterparts. New information triggers trading to buy or sell underlying assets, with little regard for the longevity of the decision or whether the market already reflects the new information. The end result is rapid one-way directional trading. We have witnessed individual shares move much more dramatically than in the past on less meaningful fundamental information. A single-day 10-20% stock move is now commonly a 20-40% single-day stock move. As you can imagine, exaggerated moves lead to a less efficient market, and therefore a growing opportunity for long-term investors.
We believe that the best way to approach rapidly vacillating markets is with a long-term approach. A patient, well-informed investor should be able to translate short-term rapid market dislocations into better long-term returns. Our research efforts extend well beyond what is occurring, focusing more on why it is occurring. We believe this should allow us to take advantage of market opportunities while many are simply reacting to the latest tweet. For those that have a long-term time horizon, we welcome you to join us on this journey.
All the Best to You,
AKW