To Our Investors and Friends,
The S&P 500 Index (S&P 500) increased 2.6% during the month of February as the market anticipated an economic recovery on the horizon. Fears of a slow oil production ramp-up during this anticipated recovery drove oil prices up a steep 17.8% this month, to end at almost $62 per barrel. The 10-year treasury bond increased 33 basis points (bps) in the month to 1.44 bps, while the spread between the 2- and 10-year widened 30 bps to 130 bps. As would be expected, the anticipation of a rapid economic recovery drove value to significantly outperform growth and small cap to outperform large cap. The Russell 2000 Value Index increased 9.4% for the month, followed by the Russell 1000 Value Index, which gained 6.0% for the month. The Russell 2000 Growth Index increased a more modest 3.3%, while the Russell 1000 Growth Index, which beat large cap value by over 35% in 2020, was flat for the month.
Since the onset of COVID-19 about one year ago, humanity has dramatically changed how we live and work. This has caused people an unusual amount of stress and anxiety, often leading to erratic and sometimes horrific behavior. As explained in Nicholas Christakis’s Apollo’s Arrow, The Profound and Enduring Impact of Coronavirus, stay-at-home orders and a change in daily life has caused people around the world feelings of considerable loss, often leading to depression. “The damaging psychological impact of plague has been known for a long time…the corruption of the mind was much more dangerous during an epidemic than the …air that we breathe around us.” In an attempt to regain control of their lives, many blame others for the disease, instead of the faceless virus itself. We attribute this blame game in part for the attack on the Capitol in early January, and even the erratic trading of GameStop (GME) over the last month as the little guy pushed back against Wall Street (Gamestock anyone?).
Christakis believes that the economy will continue to be impacted by the “clinical, psychological, social and economic shock of the pandemic…perhaps through 2024,” or well after herd immunity is reached and COVID-19 is behind us. The long-lasting psychological impact of the disease will create uncertainty that makes us especially cautious about the market’s assumption that the world is going to quickly return to the pre-2020 economy. We don’t buy it, and instead expect many of the strengths and weaknesses revealed by COVID-19 will inalterably shape our future. The psychological impact of COVID-19 could far outlast the virus which is why we are especially interested in healthcare companies that focus on mental health, an area that we believe will be important to consumers and corporations alike. If we ever want to fully recover from this pandemic, we must compassionately embrace those with depression and anxiety, healing the wounds caused by COVID-19.
Through all of this, our focus on the digital economy and how it is changing our world remains steadfast. COVID-19 has been the event that has led to mass discovery of what is new and great about the digital world, and what is not working in the brick-and-mortar economy. We think the emerging leaders in the digital space are going to be the next FAANG (Facebook, Amazon, Apple, Netflix, and Google) of the bull market that began March of 2020 – a bull market that we think will create a next generation roaring 20s. This current market correction doesn’t mark the end of COVID-19, but the beginning of something new.
All the best to you,
Arthur K. Weise, CFA