To Our Investors and Friends,
The S&P 500 Index (S&P 500) increased 4.4% in December, enabling it to finish the year up 24.2%. The quarter represents something rare in stock markets, a retest of a low (first achieved in the summer of 2022) that was quickly followed by a new high – in this case within a mere two months. We think this capitulatory selling ended the bear market and began a new bull market. As is often the case, the bond market confirmed this bottoming followed by a new high for stocks. The 10-year Treasury Bond first rose to just shy of 5.0%, and then collapsed down to 3.9% where it ended the quarter. The 2-year Treasury dropped 80 basis points in the quarter, finishing at 35 basis points above the 10-year at 4.23%. Oil declined 6% in the month to close at just under $72 a barrel and ended the year almost 11% lower than where it began in January. The rebound that took off in November continued in December. The Russell 2000 Value Index jumped 12.5% in December, the Russell 2000 Growth Index appreciated 12.0%, the Russell 1000 Value Index rose 5.5%, and the Russell 1000 Growth Index increased 4.4%. For the year, large cap growth clearly dominated as the Russell 1000 Growth Index ended 43.7% higher, the Russell 2000 Growth Index finished up 18.7%, the Russell 2000 Value Index appreciated 14.7%, and the Russell 1000 Value Index expanded 11.5%.
We believe that 2023 will be remembered as the beginning of the new bull market driven by the emergence of Artificial Intelligence (AI). Unlike the emergence of the internet that played a greater role in certain parts of the economy over others (especially the consumer economy), AI can play an important role in improving decision making everywhere. The economy is poised to undergo the most radical transformation we have ever seen. This transformation will include the creation of new market leaders that use AI to transform business and the death of many brick and mortar economic behemoths that are too slow to react and cede their business to the next generation. We believe the short-term nature of stock market participants and record levels of investment in private equity are likely to accelerate this transition. These groups have convinced many CEOs to forego future investment for immediate cash returns, hollowing out the ability for older companies to effectively compete in a world that is both scarce in creativity and in willingness to take risks. Creative disruption at its best! We believe our portfolios hold these next generation leaders and are uniquely poised to take advantage of this transformation.
As seen in the chart below, the biggest boom periods occur during significant change, and are generally followed by busts as many speculative investments are discredited and new business models fail. Like the age of the internet, it will take years and perhaps even decades for the potential of AI to be fully appreciated, but the forward-looking stock market likely anticipates this change over the next decade, potentially overshooting and ending as all bull markets seemingly end, with a spectacular bear market in the next 7 to 10 years. This is the history of the stock market.
At Kingsland Investments, we believe our focus on long-term fundamental trends provides us with an advantage during these periods of economic transition. 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 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 January 2, 2024, 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.