To Our Investors and Friends,
The S&P 500 Index (S&P 500) dropped 4.9% in September, finishing the quarter down 3.7%. The pullback that began in August intensified in September as higher oil prices and higher interest rates drove investors to reduce their stock positions. The 10-year Treasury Bond finished the quarter up 77 basis points to end September at almost 4.6%, a level not seen since 2007. The 2-Year Treasury increased 18 basis points, finishing at 47 basis points above the 10-year to just over 5%. Oil ascended 29% in the quarter to close at just under $91 a barrel. Most indexes fell by a similar amount. The Russell 1000 Value Index declined 3.8%, the Russell 2000 Value Index declined 5.2%, the Russell 1000 Growth Index fell 5.4%, and the Russell 2000 Growth Index dropped 6.6%.
We believe this quarter’s sell-off was largely driven by market participants who are increasingly influencing each other, resulting in outsized moves both higher and lower in short periods of time. As shown in the chart below, the growth of hedge funds, algorithms and short-term derivative instruments feed on each other, leading to highly exaggerated moves in many stocks, but especially small cap growth stocks, which distinguished themselves to the downside this last quarter. Highly predictable businesses whose stocks would closely track revenue and earnings growth in a low turnover, long-only environment have now become increasingly volatile as hedge funds, algorithms and derivative instruments move in rapid succession in response to slight changes in fundamentals, interest rates, commodities and popular trader triggers such as moving averages and Fibonacci sequences.
The result has been a material exaggeration of stock moves in short periods of time. Fundamental changes that may have led to a stock appreciating five to 10% in the past are now leading to 25 to 50% moves that are then quickly reversed in the next quarter. In fact, this type of volatility has been commonplace across all stocks, but especially in stocks with a smaller market cap with less institutional ownership.
At Kingsland Investments, we focus on long-term fundamental trends and try to take advantage of the outsized moves in stocks driven by these mechanical influences. We believe that a slow and steady approach to investing has the potential to lead to greater consistency of buy and sell decisions as we tune out this short-term noise. This allows us to enjoy the benefits of compounding, which has the potential to generate significant gains over time.
All the best to you,
Arthur K. Weise, CFA
The views expressed are those of Kingsland Investments as of October 1, 2023, 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.