To Our Investors and Friends,
The S&P 500 Index (S&P 500) increased 11.7% in the last quarter of 2020, enabling a 16.3% annual gain in a highly tumultuous year. Oil advanced 21% in the quarter to end at over $48 a barrel on the view that demand should improve in 2021. This move reduced oil’s drop for the year to approximately $12 a barrel, or 21% lower than at the end of 2019. The 10-year increased 24 basis points (bps) in the quarter to 93 bps, while the spread between the 2- and 10-year widened a similar 24 bps to 80 bps. We can thank the Federal Reserve’s early monetary stimulus at the beginning of the crisis for the significant increase in the stock market last year and for the noteworthy recoveries in interest-sensitive sectors like housing and autos. Small cap stocks roared ahead in the last quarter of the year, helping this part of the market to catch up to larger companies that posted better returns for much of the year. The Russell 2000 Value Index advanced 33.4% for the quarter while the Russell 2000 Growth Index increased 29.6%. This year-end move helped the Russell 2000 Growth Index to post a 34.6% increase for the year and the Russell 2000 Value Index to post a much more modest 4.6% annual gain. Large cap stocks performed less robustly for the last quarter of the year. The Russell 1000 Growth Index gained a more modest 11.4% for the quarter, finishing the year up 38.5% and the Russell 1000 Value Index advanced 16.3% in the quarter, edging into positive territory (up 2.8%) for the full year.
We have highlighted the stark differences between the digital economy and the industrial economy since the founding of Kingsland Growth Advisors a little more than two years ago. COVID-19 acted as a catalyst to accelerate the digital economy in a way that most could not have anticipated, including us. We think that the strength of the digital age companies will build upon itself, and the weakness of the brick-and-mortar economy and will diminish the importance of many companies in the future. This reshuffling of the economy is ultimately being driven by business transformation enabled by the intelligent tools of the fourth industrial revolution, including artificial intelligence, big data, internet of things (the network of physical objects connected to the internet), robotics, genetics, and other innovations that are shaping how we live and work. Although it is way too early to tell, it is possible that this is the beginning of a new “Roaring 20s” that mimics the changes to the economy that occurred 100 years ago with the widescale acceptance of automobiles, radio, telephone, and electricity that all drove the second industrial revolution.
As can be seen in the following chart, the performance of the members of the S&P 500 revealed the difference between old and new. The youngest cohort experienced tremendous growth after the additions of dynamic businesses like Tesla (TSLA) and ETSY (ETSY) to the S&P 500 late in the year. In fact, the average company in this 25-and-under cohort appreciated 55% in 2020. The 26- to 50-year-old cohort S&P 500 stocks grew a robust 18% in 2020. Of note, Amazon (AMZN) turned 26 this year. Older companies were either only slightly higher or flat for the year as the constituents lost relative ground to their younger peers. At the end of the year, 13% of the S&P 500 weight were companies 25 years or younger; 33% companies between 26 and 50 years old; 23% are 50 to 100 years old, and 31% of the Index weight consists of businesses over 100 years old. The 50-and-under crowd grew from 38% to 46% of the Index weight in 2020, an 8% shift in weight from just one year ago. What does this mean? Even after the Index added a number of next generation companies last year, the S&P 500 still primarily consists of old economy companies, which likely will continue to provide modest returns in the future.
Chart source: www.slickcharts.com.
Kingsland Growth Advisors believes that the digital economy is just beginning to transform the overall economy. Even after a robust year for growth stocks, we believe ample opportunity remains for capital appreciation of these new and next-generation blue chip stocks in the future. We will try to continue to position our portfolios for growth and explore new opportunities that will lead the economy of the current decade and beyond.
All the best to you,
Arthur K. Weise, CFA