To Our Investors and Friends,
The S&P 500 declined 2.8% during the month of October, as a global increase in COVID cases threatened to dampen the recovery, and election jitters impacted investor enthusiasm for stocks. Oil plummeted 11% in the month to less than $36 a barrel as lockdowns in Europe reduced demand. The 10-year increased a robust 19 bps in the month to .88%, while the spread between the 2- and 10-year widened 18 bps to 74 bps. For the first time in a long time, small cap value dominated the market. The Russell 2000 Value Index increased 3.6% in the month, helped by an improved outlook for banks. The Russell 2000 Growth Index gained a more modest .8%. Large cap indexes declined this month. The Russell 1000 Value Index declined 1.3% and the tech heavy Russell 1000 Growth Index dropped 3.4%, likely driven by profit taking ahead of the election.
There is considerable anxiety surrounding this election cycle. The health crisis and economic crisis has done nothing but increase concern surrounding the outcome of the election. We believe the economy and the stock market are poised to move higher over the next four years, no matter what the outcome this week. COVID has revealed the power of the digital economy to support and eventually largely replace the old economy of the brick and mortar world.
Last week, Microsoft’s CEO Satya Nadella stated simply, “The next decade of economic performance for every business will be defined by the speed of their digital transformation.” This economic change is a force that even our politicians cannot prevent, no matter how much their constituents want them to. It empowers corporations to do business where they can maximize their results. Corporations are no longer tied to a city, state, or country to move their operations forward. In fact, a growing number of California-based technology companies are allowing their employees to work wherever they want on a permanent basis. This freedom will certainly help them attract and retain the best employees, thereby accelerating business development and growth of their companies. Those companies tied to a brick and mortar footprint will simply be at a growing disadvantage.
Policy changes can impact business at the margin, but if any company needs government policy to survive, it has already lost. We don’t invest in these old relics dependent on political favoritisms for survival. We focus on the future, and will continue to search for the very best businesses the market has to offer and look to own their shares as long as their opportunities are poised to drive the growth of their businesses. We encourage our investors to take advantage of any dislocation in the market over the next week or so to add to these industry leaders. Their future is bright, and if market depression over political outcomes provides an opportunity to buy their shares at lower levels, we will be there to do so.
All the Best to You,
AKW