To Our Investors and Friends,
A rapid increase in both the 10-year Treasury bond yield and the Federal Reserve (Fed) discount rate since the beginning of the year prompted one of the worst market selloffs on record, significantly intensifying this past quarter. The S&P 500 Index (S&P 500) declined 16.5% in the quarter to finish in bear market territory - down 20.6% year-to-date. This decline matches the worst drop in the first six months of a year since 1970. That year, the market finished the year flat, recovering all the losses in the following six months.
For the month, the S&P 500 dropped 8.4%, as commodities joined the rest of the market’s decline. Oil prices fell 7.8% in the month, closing at $106 a barrel as fears of recession finally began to impact the commodity. A surprising 75 basis point interest rate hike by the Fed drove the 10-year Treasury bond up 13 basis points, ending the month at 3.0%. The two-year Treasury moved up 39 basis points to 2.9%, shrinking the spread between the two- and 10-year to six basis points from 32 basis points just one month ago. For the first time in many quarters, growth stocks declined at a slower pace than value, but remain well behind value for the full year. In June, the Bloomberg 2000 Growth Index declined 7.3%, the Bloomberg 1000 Growth Index dropped 7.8%, and value fell a little harder as seen by the Bloomberg 1000 Value Index’s 9.3% decline and the Bloomberg 2000 Value Index’s 11.6% drop.
Fear, uncertainty and doubt have taken over the market since the beginning of the year, leading to one of the fastest drops in the market in memory. The market’s rapid decline has impacted just about every sector this year, except for energy which remains up almost 30% year-to-date. The most severe declines reside in technology, communication services and consumer discretion, areas that generally both benefited from the expansion of the digital economy during COVID-19 and are now facing significant skepticism regarding their future growth prospects. The prominence of trend-following quantitative strategies and the growing influence of passive index funds, which buy and sell entire sectors at the same time, has created an environment that is the most indiscriminate in its selling of individual stocks than at any time that we can remember over the past 25 years. The result has been a broad-based selloff of both speculative stocks for which there are few prospects for recovery and we believe some fantastic businesses that likely prove themselves in the quarters ahead.
We have spent a considerable amount of time studying the development of leading companies and believe that most notable is their ability to rebound much faster than the overall market as they take share from others and recover their robust growth rates before the averages. The chart below illustrates both fundamental growth (dotted line) and stock performance (solid line) over time for four types of businesses: (S) speculative businesses that never develop, (H) high-growth businesses (20% annual growth rate), (M) medium-growth businesses (10% annual growth) and (L) low-growth businesses (5% annual growth). For simplicity, we kept fundamental growth consistent and altered stock returns according to how they behave over time. Speculative stocks tend to increase the most in bull markets, are discredited and never recover. High-growth companies tend to move up with speculative stocks, are knocked down aggressively as speculative fervor dissipates and then recover as their business models continue to compound. Medium-growth companies more closely track their fundamental growth through the cycle. Finally, low-growth companies often underperform their growth until the market downdraft, at which time they move up as investors seek safety. Ultimately, as we see it, the higher the growth, inherently the higher the volatility.
Source: Kingsland Investments as of 6/30/2022. For illustrative purposes only.
Kingsland Investments focuses on powerful long-term trends and the businesses and management that drive them to help discover new market leaders. This effort creates the greatest return potential during market selloffs like the one we are experiencing now. Unlike many of our peers that are abandoning these next-generation growth leaders to find safety in mature businesses, we’ve stepped up our hunt for the hidden gems thrown out by the market. Although it has been a rough couple of months, we think patience will be well-rewarded when the next bull market begins.
All the best to you,
Arthur K. Weise, CFA
*Effective January 12, 2022, the Kingsland Growth Advisors name changed to Kingsland Investments. The views expressed are those of Kingsland Investments as of June 30, 2022, and are not intended as investment advice or recommendation. For informational purposes only. Investments are subject to market risk, including the loss of principal. Past performance does not guarantee future results. The stocks mentioned are for illustrative purposes only and are not a recommendation to buy or sell. There can be no assurances that any of the trends described herein will continue or will not reverse. Past events and trends do not imply, predict, or guarantee, and are not necessarily indicative of future events or results. Investors cannot invest directly in an index.