Last year, we enjoyed a strong finish to a spectacular decade for investors. How spectacular? From January 2010 through December 2019, the S&P index rose 290%, excluding dividends. Leading individual stocks performed even better. Amazon--a core long-term holding in client accounts—soared 1,274% over the decade. Apple—the largest single stock position across our firm—rose 975%, excluding dividends.
Despite losing their visionary leader in 2011, Apple had a tremendous decade and became the first trillion-dollar company. In the last 10 years, Apple invented the “tablet” (iPad, 2010), revolutionized wearable technology (Apple Watch, 2015; AirPods, 2016), shipped over 1.5 billion iPhones, and returned over $352.15billion to shareholders (dividends and buybacks). In 2019 alone, the company paid out $35 billion in earnings to App Store developers. Most recently, Apple launched a promising new suite of “Services” to enhance and fortify their thriving ecosystem.
This is why it can be so rewarding to be a long-term investor/owner of innovative and disruptive growth companies. The pace of technological advancement is only accelerating, engendering even more opportunities to identify and own the companies that will shape the future in ways not yet imagined.
It is truly an exciting (and challenging) time to be an investor. The surge in passively-managed assets has altered the investment landscape. An overwhelming majority of new money flowing into equity markets is invested in “passive” instruments (Index Funds, ETFs). Increasingly, markets are driven by algorithmic, high-speed trading activity. To get an “edge” in today’s market it is necessary to have a well-vetted, fundamentally grounded investment strategy and capitalize on moments of extreme volatility.
Looking forward, we begin 2020 with the stage set for benign economic (and market) growth. Domestic unemployment remains steady at 3.5%, the lowest level in 50 years. Official inflation metrics are subdued at or below 2% thanks in part to the deflationary nature of technological innovation. A “Phase One” trade deal with China—signed January 15—allows Trump to declare victory and focus on getting re-elected in November.
The Fed is most likely “on hold” this year. However, should improving economic data and a tightening labor market cause inflation to meaningfully pick up, the Fed may rescind one or two of the last year’s “mid-cycle adjustment” rate cuts… if only to reassert the semblance of political independence.
Pockets of domestic economic weakness do exist—particularly in manufacturing—where the halt of Boeing 737 MAX production could detract 0.5% from U.S. GDP in early 2020. Nevertheless, we do not see the symptoms of an imminent recession in the United States.
Low interest rates keep equities attractive relative to yields on “risk-free” US Treasury Bonds (the 10 yr. @ 1.72%). But we remain diligent and cognizant of risks that lurk beneath the market’s surface. Valuations are stretched above historic norms, and investor sentiment feels overly complacent to begin 2020. Short-term, markets look susceptible to a repricing of risk; thus our discipline as risk-managers tells us to modestly reduce overall equity exposure for all but the most aggressive (and young) clients.
Catalysts that could challenge the bull market include: (1) Democrats winning the White House this Fall; (2) a meaningful change in Federal Reserve monetary policy (resurgence of inflation); (3) emergent credit problems, which have largely been dormant/disguised due to the ongoing era of low interest rates; and (4) a “Black Swan” event such as war in the Middle East, terrorist attacks, a prolonged coronavirus outbreak, etc.
One of the most rewarding aspects of our job has been finding and investing in companies, products, and services that are making the world a better place. And despite the proliferation of negative headlines, the world is a better place today than ever before. In the last 20 years, 1 billion people have been pulled out of extreme poverty (1.7 billion people living in extreme poverty in 1999, down to approximately 700 million). Over 55% of the world population lives in a democratic society today, up from 9.3% in 1940. And more than 300,000 people gain access to electricity and clean water for the first time every day! While work remains to be done, these trends are encouraging and demonstrate that the world is indeed becoming a better, safer, more prosperous place for more and more people.