To Our Investors and Friends,
The S&P 500 fell 8.4% in February as the Coronavirus spread globally and now threatens to lead the global economy into recession. Oil prices (WTI) continued their decline from the previous month, down 13% to less than $45 a barrel as canceled air travel routes and the postponement of major conferences and events threaten to curtail oil demand. The 10-year dropped 38 basis points during the month to end at 1.13%, the lowest level ever recorded. The spread between the 2- and 10-year is 27 bps. The effective FED funds rate is 1.58 bps and again is creating an inversed yield curve, which often foretells of recession. All indexes turned sharply negative at the end of the month. The best performing major index, the Russell 1000 Growth, declined 6.8%. The Russell 2000 Growth was down a sharper 7.2%. Financial and Energy stock declines led to much worse performance for value. Both the Russell 1000 Value and Russell 2000 Value indexes fell 9.7% for the month.
Oftentimes, a crisis can accelerate a trend or create a new one. Two hundred years ago, the eruption of Mount Tambora in Indonesia darkened the sky and led to the year without a summer in 1816, causing a worldwide famine. Without enough to feed them, horses were slaughtered by the thousands. In need of a new form of transportation, the bicycle was invented. More recently, the great recession of 2008 and 2009 forced many to abandon their expensive Starbucks cup of premium coffee in favor of the much more affordable Keurig K-Cup. During the same time, millions of newly unemployed people sought out new fortunes by creating their own businesses. The resulting explosion of entrepreneurs helped launch consumer retail software platforms such as Shopify (SHOP) and ride sharing giant Uber (UBER).
Make no mistake, the Coronavirus is a serious health concern for segments of the population. However, from a business perspective, we think it could accelerate existing trends and create new ones that will continue to advance Fourth Industrial Revolution beneficiary companies at the expense of older companies. Telecommuting and telemedicine are certainly going to see faster growth in the future as individuals are forced to try new alternatives to both work and doctor visits. Migration to the cloud likely accelerates because the data center model will have trouble dealing with this new way of working. In education, online services are being adopted as a supplement and possible replacement for in-class education. Finally, governments are likely to pick up their spending on mass communication systems to help better prepare the public for future outbreaks.
Our search continues for transformational businesses…those companies that offer superior solutions to what currently exists. Such companies generally experience rapid revenue growth that eventually leads to even faster earnings growth, although oftentimes later in the company’s life cycle. There is frequently an unanticipated accelerant to these businesses that allow them to emerge bigger and better than previously thought possible. We hope that the coronavirus is not nearly as bad as currently feared, but nevertheless will use this time for more intensive discovery.
All the Best to You,
AKW