To Our Investors and Friends,
The rally in the stock market continued in February as the S&P 500 index increased by 5.2% in the month. The 10-year Treasury Bond drifted up on strong economic data, ending the month at 4.25%, 26 basis points higher than at the end of January. The 2-year Treasury ended the month 37 basis points higher at 4.64%, a widening 39 basis points above the 10-year. A better US economy helped oil move up 3% to close the month at $78 a barrel. All major stock averages also moved up. The Russell 2000 Growth increased 7.6%, the Russell 1000 Growth gained 6.1%, the Russell 1000 Value moved up 3.3%, and the Russell 2000 Value increased 2.3%.
The market’s rapid ascent this year bodes well for the continuation of the bull market. Unlike most new bull markets, however, it is unusually narrow and often led by just a handful of dynamic stocks. Some of these stock moves appear to be driven by momentum traders (or algorithms) gone wild. The Russell 2000 Growth’s positive performance this year is being driven by a handful of names in red hot areas including weight-reducing GLP-1 hopeful Viking Therapeutics (VKTX), up 314% (with a potential drug approval several years away at earliest), Nvidia chip beneficiary Super Micro Computer (SMCI), up 204%, and bitcoin owner Microstrategy (MSTR), increasing 62%. These three stocks are all small cap proxies for areas of interest by market participants and accounted for about 75% of the Russell 2000 Growth’s total return YTD. None of these stocks are in our portfolio.
In his latest book, Same as Ever, A Guide to What Never Changes, author Morgan Housel discusses how patterns in human behavior show up again and again in the stock market and cautions us not to act too hastily. He explains, “the more your time horizon compresses, the more you rely on luck and tempt ruin.” We believe that rapid access to information has led to FOMO (fear of missing out) unlike anything we have experienced before and is the most likely driver of these rapid stock gains. Housel further explains, “every investment price, every market valuation, is just a number from today multiplied by a story about tomorrow.”
It generally takes years for businesses to develop and create profits great enough to support large stock moves. This really cannot be shortchanged. Housel further explains, “most things have a natural size and speed and backfire quickly when you push them beyond that.” At Kingsland Investments, we believe in patient, long-term investing in some of the most creative management teams building the best businesses we can find. We think it is very important to not get caught up in the moment, and make sure that market momentum is justified by solid fundamentals building a foundation that supports ever increasing stock prices.
All the best to you,
Arthur K. Weise, CFA