To Our Investors and Friends,
The S&P 500 increased 8.5% in the fourth quarter as concerns surrounding the potential for an economic slowdown dissipated during the quarter. Oil prices (WTI) increased almost 13% to $61 a barrel as economic growth around the world picked up modestly. The 10-year increased 24 basis points during the quarter to end at 1.92%, while the spread between the 2- and 10-year expanded to 34 bps, the widest seen since the beginning of the year. Small caps led the market in the final quarter of the year. For the quarter, the Russell 2000 Growth finished up 11.4%, modestly beating the Russell 1000 Growth up 10.6%. On the value front, the Russell 2000 Value expanded by 8.5% and the Russell 1000 Value returned 7.4%.
Many market participants have spent a lot of time and effort arguing that value should begin to beat growth on a sustained basis. We don’t share this view because we think the difference in performance between the different styles is driven by real, sustainable economic change.
Over the last decade, the Russell 1000 Growth Index increased by 312%, driven by a handful of technology companies now commonly referred to as FAANG – Facebook, Amazon, Apple, Netflix, and Google (now Alphabet) – which all experienced much faster stock appreciation than the index (led by NFLX up over 4000%). The Russell 1000 Value increased a more modest 205%, and the S&P was up 190%. Customer-centric companies are using the tools of the fourth industrial revolution to create better businesses than those they are replacing. This trend is set to continue and is being bolstered by an emerging consumer that is seeking advanced technology to simplify their lives. This technology has an added benefit of keeping inflation at bay as sharing services reduce demand for the asset heavy products produced by the previous industrial revolutions. The chart below highlights how these younger companies have grown materially faster in both revenue and stock appreciation than their older peers.
Revenue and stock appreciation of the top 250 S&P 500 companies over 10 years
We don’t expect FAANG to dominate the indexes’ performance over the next decade but believe that a new crop of technology leaders will follow in the footsteps of these established companies. New tools such as artificial intelligence, nanotechnology, and big data analytics are being used to reshape our world. Our effort is focused on identifying and owning these companies that we believe will drive returns over the Roaring ‘20s.
All the Best to You,
AKW