To Our Investors and Friends,
The S&P 500 Index (S&P 500) increased 2.22% in June, driven by growth stocks for the first time in many months. Oil increased 11% in the month to end slightly over $73 a barrel, reaching a level not seen since 2018. The 10-year Treasury bond declined 13 basis points to 1.45%, as did the spread between the 2- and 10-year, ending the month at 99 basis points, a 29 basis point contraction. After hibernating since last September, large cap growth finally emerged from its slumber, up 6.3%. The Russell 2000 Growth Index increased 4.7%. On the value side, many stocks gave back some of their recent gains. The Russell 1000 Value Index contracted 1.2%, and the Russell 2000 Value Index fell 0.6%.
The economy’s dramatic change from a nearly complete shutdown to rapid reopening driven by a faster than expected vaccine rollout around the world has turned the market’s attention to inflation. Some market strategists have suggested that “reopening related” inflation could be the beginning of high inflation that was last experienced back in the 1970s (as seen in the chart below). Supporting this is a view that US oil production is now hindered by ESG (Environmental, Social, Governance) considerations and could be followed by greater regulations to stem global warming. Oil was a primary driver of inflation in the 1970s, since it is a major expense in the production of all commodities and the primary fuel for an industrial economy. In addition, the returning labor force is demanding higher wages as they re-enter the labor market. Having discovered new freedoms of the “gig” economy, many workers can demand meaningfully higher wages for traditional low skill jobs. Other market strategists have suggested that these pressures are transitory and due to friction that occurs as supply lines are reactivated and inventory restocked. Over time, such re-opening periods spark technological innovation that dramatically increase productivity and offset inflationary pressures.
We believe that Inflation will likely remain a topic of intense debate and has been the narrative supporting value’s superior performance versus. growth over much of the last year. In “Mind is Playing Tricks on Me” Part 2, we examine the popular myth that growth stocks are hurt by inflation, while value stocks benefit (last month, Part 1 attempted to debunk the idea that we are in a second tech bubble). We calculated the stock returns of both leading technology and industrial companies during the 1970s. The stock returns of our technology cohort through the decade are as follows: Intel (INTC’s IPO was in 1971): 3,040%; Texas Instruments (TXN): 41%; and Hewlett Packard (HPQ): 130%. The stock returns of our industrial cohort were Caterpillar (CAT): 91%; Honeywell (HON): 102%; and Boeing (BA): 440%. Contrary to popular myth, there was no sector-skewed difference in returns between these two groups. As has been the case for decades, stock performance over any meaningful period is directly tied to revenue and earnings growth. For average companies, mature companies with fewer competitors often are more successful passing on price increases than developing industries with many competitors. This slight edge of the average is no match for superior stock picking.
At Kingsland Growth Advisors, we will continue to search for and own what we believe to be the best growth companies. Investors will love these companies some of the time and favor cyclical companies or dividend stocks at other times. We think these robust business models have the potential to produce strong stock performance for the underlying shares over many years. With a long-term horizon in mind, we believe the current correction in growth stocks affords a good opportunity to buy some of the best companies out there at relatively attractive price levels.
All the best to you,
Arthur K. Weise, CFA