To Our Investors and Friends,
The S&P 500 Index (S&P 500) declined 2.2% in October, bouncing off a 10% pullback from the July high. This significant pullback is directly tied to an increasing 10-year Treasury Bond that is now the highest seen since 2007. The 10-year Treasury Bond finished the month up 29 basis points to end October at almost 4.9%. The 2-year Treasury increased four basis points, finishing at 19 basis points above the 10-year to just over 5%. Oil fell 11% in the month to close at just over $81 a barrel. The stock market decline, completing its third month, impacted every major index. For October, the Russell 1000 Growth Index declined 1.4%, the Russell 1000 Value Index fell 3.5%, the Russell 2000 Value Index declined 6.0% and the Russell 2000 Growth Index dropped 7.7%.
The weakness over the last three months has been incredibly rapid and, in many cases, in opposition to what many long-term investors would have expected. In Robert Sapolsky’s Behave, The Biology of Humans, the author discusses how humans make decisions, which we believe may help explain some of the recent volatility in the market. According to Sapolsky, “Fear activates the amygdala in humans, with more activation predicting more behavior signs of fear.” The amygdala generates instinctive responses designed over tens of thousands of years to respond to a life-threatening danger that prevents us from reacting to every fear-inducing development in the brain’s frontal cortex. It keeps the amygdala in check by, among other things, focusing on such activities as “long-term planning, the regulation of emotions, and reining in impulsivity.” Sapolsky concludes, “The frontal cortex makes you do the harder thing when it is the right thing to do.”
We believe there has been a considerable absence of frontal cortex decision-making in recent months, in part because many investors are reacting to price movements higher or lower driven by fear, not fundamentals. We think the market’s response to weight loss/diabetes drugs is the perfect example of this. As can be seen in the chart below, the weight loss drug manufacturers Elli Lilly (LLY) and Novo Nordisk (NON.DK) have appreciated 51% and 44%, respectively, this year on the expectation that the GLP-1 inhibitor market (or appetite suppressant drug market) is more than 10 times larger than current year sales. This projection does not consider early evidence that these GLP-1 inhibitors are difficult to administer, have negative side effects and are financially unattainable for most people.
Starting in July, and coinciding with a meaningful step up in purchases of the drug companies mentioned above, the market aggressively sold off both medical device companies of all shapes and sizes and most severely diabetes-related medical device companies. As seen in the chart below, the medical device ETF (IHI) is down almost 14% year-to-date, while leading Continuous Glucose Monitoring (CGM) company Dexcom (DXCM) has declined 22% year-to-date. This has occurred despite growing evidence that the health benefits of weight loss drugs can be improved when used in conjunction with a CGM.
Source: William O’Neill’s Panaray. Past performance does not guarantee future results.
At Kingsland Investments, we focus on long-term fundamental trends with the goal of taking advantage of short-term moves in stocks that are disconnected from long-term trends. 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 November 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.