To Our Investors and Friends,
The S&P 500 increased 5.5% during the month of July, building on its second quarter gains. After a tremendous run from the bottom, oil increased a more modest 2.6% to end the month at just over $40 a barrel. The 10-year fell during the month to 55 bps, a 14 bp decline, while the spread between the 2- and 10-year narrowed to 34 bps. As has often been the case over many quarters, large outperformed small, and growth outperformed value. The Russell 1000 Growth increased 7.7% in the quarter, helped by strong performance from mega-cap technology companies. The Russell 1000 Value gained 4.0%, helped by both consumer staples and the utility sector. In small caps, the Russell 2000 Growth expanded 3.4% and the Russell 2000 Value grew 2.1%.
We are questioned daily as to whether this rally is Tech Bubble 2.0. We believe that unlike the tech bubble of our parents in the late 90s, the consistent rally in the technology sector is quite different and is driven by sustainable fundamentals. We think the market has entered a golden era of growth as the digital economy is becoming the mainstream economy, and the industrial economy is losing its importance as a driver of economic growth.
The modern industrial economy began with the invention of the modern internal combustible engine in 1876, followed by the invention of the automobile in 1886. Once created, it took decades for these advances to change the global economic landscape. The Federal Highway Act of 1956 established the modern US highway system that enabled the connectivity required for a robust industrial economy across the United States. For much of the last two decades, China built a similar system across their country to build out their industrial economy.
We see a parallel in the digital economy that began with the introduction of the semiconductor industry in the 1960s and the personal computer industry in the 1980s. The internet is the highway system that not only connects both smart phones and computers across the US, but across the world. This connectivity is allowing for growth arguably unlike anything we have ever seen in the history of the planet.
We decided to compare the growth trajectory of e-commerce leaders Amazon (AMZN), founded in 1994, and e-commerce tools enabler Shopify (SHOP), founded just a decade later. As can be seen in the chart below, after its first decade of growth, Amazon was able to grow their revenue at a 31% annual rate from year 10 through year 17 since founding. During this same time frame since founding (SHOP is now 17 years old), Shopify was able to grow their GMV (value of merchandise sold on sites using the Shopify e-commerce engine) at an 82% annual rate. We believe this much faster growth can be attributed to both vastly greater connectivity among devices just ten years later as well as vastly greater receptivity of consumers to participate in e-commerce. In fact, this greater connectivity helped Amazon grow its revenue by another 10-fold over the last decade.
The technology bubble of the late 1990s was built primarily on speculation about what would come. Today’s technology driven bull market is largely based on robust fundamentals that are growing at a rate that we have never seen before. Although some stocks most likely will need to consolidate before going higher, we believe that this new bull market has a long way to go. We will continue to spend our time discovering and owning these next generation blue chip companies and enjoy the benefits of their growth as they reshape the global economy.
All the Best to You,
AKW