To Our Investors and Friends,
The S&P 500 increased 20.0% in the second quarter as the market anticipated the end of the economic and healthcare crisis driven by both massive monetary and fiscal stimulus and a decline in COVID-19 cases throughout Asia and Europe. Oil prices (WTI) rebounded a robust 92% to over $39 a barrel as signs of an economic recovery began to appear in China and other parts of the world. The 10-year was little changed from last quarter, ending 4 bps lower at 66 bps, while the spread between the 2- and 10-year ended at 50 bps. Growth stocks continued to lead the market - the Russell 1000 Growth was up 27.8% in the quarter compared to the significantly less robust 14.3% gain in the Russell 1000 Value. Small cap stocks rebounded more significantly than larger companies, but the growth-value disparity was equally wide. The Russell 2000 Growth expanded 30.6%, helped by both technology and healthcare, and the Russell 2000 Value rebounded a less robust 18.9% as the recovery in financials was one of the weakest since the market bottom in late March.
John Oliver opens his weekly show with the words “welcome, welcome, welcome!” This is an appropriate enthusiastic greeting for the Millennial Generation that has entered the stock market en masse during the last several months. Retail investors historically have shown up late to a bull market. This new group of investors uncharacteristically entered the market during a rare 30%+ sell off.
The Millennial Generation has had little exposure to equity markets since the 2009 market bottom, but according to brokerage firms, millions of younger investors have used their COVID-19 stimulus checks to open discount brokerage accounts in recent months. Robinhood, the newest discount brokerage entrant and innovator, has helped lower the barrier to entry for new investors through both the introduction of zero commissions and fractional shares to enable small investors to own companies with share prices in the hundreds or thousands of dollars per share. These first time Millennial investors are a stark contrast to what the older Baby Boomers have done during the same time frame. Some brokerage firms estimate that about a third of investors over 65 sold all their stocks during the market downdraft.
We may be witnessing a generational transition in the stock market. Given that Millennials are just entering their mid-30s and should be experiencing strong wage gains for years to come, it could provide a long tailwind to the market. In addition, a Visual Capitalist report estimates that $30 trillion dollars, the biggest wealth transfer in history, will move to Millennials over the next 30 years. A potential generational transition may in small part explain the disparate experience of value stocks vs growth stocks. A survey collected by Morning Brew suggests that 49.7% of Millennial investments are in the technology sector, and an additional 12.1% are in the healthcare sector, versus a combined 7.6% in industrials, financials, and materials. This may help explain some of the dramatic disparity across different sectors in the market. It is hard to believe a Millennial will choose to buy such old blue chips as GE, Wells Fargo, and US Steel over new blue chips Tesla, Netflix, and Shopify.
Whether or not this new group of investors sticks around as the economy recovers, we will continue to focus on finding innovative companies that harness the power of technological change that improves people’s lives. We think that this focus on the future should continue to drive positive returns for our investors that likely will continue to exceed the returns of the S&P 500 over time.
All the Best to You,
AKW