To Our Investors and Friends,
The S&P 500 Index (S&P 500) fell 1.1% in the first month of 2021. Oil advanced 7.6% this month to end at over $52 a barrel on the view that demand should improve throughout the year. The 10-year treasury bond increased 18 basis points (bps) in the month to 1.11 bps, while the spread between the 2 and 10-year widened 20 bps to 100 bps. Small cap stocks continued to lead the market higher, a trend that began late last year. The Russell 2000 Value Index advanced 5.3% for the month while the Russell 2000 Growth Index increased 4.8%. Large cap stocks began the year in decline. The Russell 1000 Growth Index decreased 0.7% for the month, and the Russell 1000 Value Index declined 0.9%.
According to Yuval Noah Harari, author of Sapiens, A Brief History of Humankind, Adam Smith’s groundbreaking book, The Wealth of Nations, presented a much better alternative to the economy run by the aristocrats of their day. Capitalists were incentivized by profit to build factories that would provide jobs to workers and cheaper goods to society in a way that benefited everyone. Greater profit meant more money to build, create jobs, and lower prices for all. This virtuous cycle was far better than the wasteful spending of aristocrats that went to finance ornate palaces, ostentatious clothing, and elaborate parties that provided little benefit to the rest of society. For over 200 years, the incentive structure created by capitalism has been the driving force behind economic growth that brought significant numbers of the world’s population out of poverty. In the United States, this virtuous cycle remained present up until the early 1970s, as all levels of society grew their standards of living at a relatively similar rate.
Among many things clearly revealed by COVID-19 is the vast growing disparity between the top and bottom earners in our country. In fact, a recent Washington Post article, “The Covid-19 Recession is the Most Unequal in Modern U.S. History” reveals that the top 25% of workers by income experienced a slight increase in compensation since the onset of COVID-19, and the bottom 25% of workers experienced a 30% decrease over the same time frame, exacerbated by unemployment ranks that grew at eight times the rate of the top 25% of earners. Unlike the economy of 50 years ago, many large corporate leaders have spent much of the last 20 years shedding the lower paying jobs of the many to provide greater income to the few. We believe this has dramatically weakened the foundation of some of America’s oldest blue-chip companies, and like the aristocrats of centuries ago, has opened an opportunity for an economic system that is better for all...which we call “Good Capitalism”.
Like the early capitalist that created virtuous cycles for society, we believe many leading digital economy companies are doing so now. Shopify (SHOP), Square (SQ), and Etsy (ETSY), among many, are using the tools of the fourth industrial revolution to build businesses that benefit consumers, their workers, and shareholders alike. We believe that these virtuous cycles will continue to drive their businesses forward as many older businesses suffer from the inequities of their own making. We acknowledge that this is aspirational and that inequities won’t disappear overnight, but we think as investors, a greater balance is required for sustainable economic growth.
We saw this past month that current imbalances can lead to unpredictable events – thousands of small investors banded together to topple formidable hedge funds through massive, short squeezes. Technology is a tool that can disrupt current norms and we expect more of these black swans in the future. As good capitalism becomes more dominant, we expect a more sustainable balance in our economy, the environment, and our democratic system.
All the best to you,
Arthur K. Weise, CFA
The views expressed are those of Kingsland Growth Advisors and are not intended as investment advice or recommendation. For informational purposes only.