09
Jan
Update and Commentary
As we reflect on the period of the prior ten years (which has no generally accepted name; the teens?, the tens?) and we look forward to the easily-nameable decade ahead it’s a good time to share some observations and current thinking.
A Look Back
Scouring several sources for the most important stories of the past decade we’re struck at the lack of any truly decade-defining, world-altering news. The eighties had the fall of the Berlin Wall and the end of the Cold War, the nineties may be about the rise of the internet, the 00’s (aughts) had 9/11 and the election of Barack Obama but what about the most recent decade? Certainly, there have been important stories; the election and Presidency of Donald Trump perhaps chief among them. Other top stories include the Brexit vote, the killing of Osama bin Laden, climate change, #metoo and #Blacklivesmatter, Deepwater Horizon, and the Cubs winning the World Series. Beyond that popular news outlets’ lists devolve quickly into things such as “Megan Markle’s wedding to Prince Harry”. Interestingly, the performance of financial markets doesn’t seem to make popular lists but we feel that story needs fleshed out.
The past decade is the first since the 1850’s that there was not a single recession. There were corrections to be sure, however every one proved to be a massive buying opportunity. It was only the second decade (other than the 1990’s) that did not experience a bear market in the S&P 500. The market came close to bear market territory in 2011 (down 19.4% from recent highs) and in 2018 (down 19.8% from recent highs). Furthermore, the decade was one of only three to have the market up nine out of ten years (the other two being the 80’s and 90’s).
Although forecasters (and doomsayers) have been anticipating higher interest rates for years the past decade saw rates drop and stay in a range-bound pattern. The decade began with interest rates (as defined by the 10-year treasury) just under 4% and ended with interest rates at just under 2%. Rates touched a low for the decade at 1.37% in July of 2016 but have traded between 1.5% and 3.5% most of the time.
In an era with not much in the way of significant news historically speaking, a stable and steadily improving economy, and luxury that could scarcely be imagined three generations back it certainly feels like there is a lot of discontent. Obviously, there are circumstances which may make us thankful for a year to end and a new one to begin, but as a species when in history has there ever been a better time to be alive?
A recent article by Nicholas Kristoff in the New York Times claims 2019 to be the best year for humans in the earth’s history. As evidence Mr. Kristoff writes:
“…since modern humans emerged about 200,000 years ago, 2019 was probably the year in which children were least likely to die, adults were least likely to be illiterate and people were least likely to suffer excruciating and disfiguring diseases.
Every single day in recent years, another 325,000 people got their first access to electricity. Each day, more than 200,000 got piped water for the first time. And some 650,000 went online for the first time, every single day.
Perhaps the greatest calamity for anyone is to lose a child. That used to be common: Historically, almost half of all humans died in childhood. As recently as 1950, 27 percent of all children still died by age 15. Now that figure has dropped to about 4 percent.
Diseases like polio, leprosy, river blindness and elephantiasis are on the decline, and global efforts have turned the tide on AIDS. A half century ago, a majority of the world’s people had always been illiterate; now we are approaching 90 percent adult literacy. There have been particularly large gains in girls’ education — and few forces change the world so much as education and the empowerment of women.”
A Look Ahead
Forgive me those of you whom I’ve already shared this line of thought but central to my thinking about the future is the idea of Moore’s Law. If you’re unfamiliar with the idea Moore’s Law states that the number of transistors on a microchip doubles every two years while the cost of computers is halved. We understand this to mean that the speed of technology is increasing exponentially while the cost of technology is dropping. Some physicists believe that in the 2020’s we will reach the end of our ability to place more transistors on a chip due to heat, of all things. The reasoning is at some point it will take more energy to cool transistors than the energy that can pass through transistors. As such Moore’s Law isn’t really a “Law”, it’s more of a concept albeit a very powerful one.
Moore’s Law seems to be not only applicable to transistors and microchips but the world around us. Perhaps other technology doesn’t increase in power or decrease in price quite as rapidly but the general effect seems to be the same. If we accept Mr. Kristoff’s timeline of humans emerging 200,000 years ago then my math suggests it took humans 196,500 years to invent the wheel. Why so long? Well, it wasn’t because no one realized round things rolled, it’s because humans didn’t have the technology to manufacture the materials needed to create fine chiseled holes and axles. It was during the Bronze Age mankind finally was able to create the tools which permitted such fine craftsmanship. The pace of productivity-enhancing inventions began to quicken. In the third millennia BC mankind harnessed the power of the lever famously utilized by the Egyptians. Next came the nail in the second millennia BC which greatly facilitated the creation of shelter for humans. Over time invention begat invention as humans worked to increase productivity, harvest yields, and back–breaking labor.
Thinking about Moore’s Law it’s no surprise we see most of the world’s greatest inventions much more recently. The introduction of paper in the 2nd century, gunpowder in the 10th century, and the compass in the 12th are examples of how civilization-altering inventions were likely to come every one or two hundred years rather than every thousand. The next eight hundred years bringing us to present day witnessed an explosion of inventions all just a moment ago from our species’ perspective. It’s our opinion that not unlike the wheel mankind currently has the imagination to build new and wondrous things, and only awaits the tools to do so. With faster and faster computers and a more educated and connected world the tools we need for the next big thing may well be right around the corner.
The oft (incorrectly) maligned Mr. Charles Duell, Commissioner of the US Patent Office in 1899, has been quoted as saying “everything that can be invented has been invented”. Research shows that in fact Mr. Duell never actually made such a claim however there are those who suggest mankind may be nearing the end of its potential.
Of course, there’s always:
Ecclesiastes 1:9
What has been will be again,
what has been done will be done again;
there is nothing new under the sun.
We’re not buying any of it literally or figuratively. We believe the future is amazingly bright and wish we could be around to see what the world is like in 500 years. We suspect leaps in technology will make it as unrecognizable as today’s world would be for our friend who realized one could place revolving wheels on a fixed axle. In the meantime, we’ll continue to be long not just technology stocks, but companies who benefit from advances in science. The future looks grim for truck drivers, but bright for trucking companies because of technology as a friend suggested over dinner recently.
Positioning for the Twenties
There are four key themes we feel need attention as we enter the new decade. Please note we are NOT recommending that these companies are BUYS today. There are merely presented as the types of companies that should benefit within each theme. A careful reader might notice some overlapping of names across themes. Those would be names that are of particular interest to us and may well show up in portfolios over the next days and weeks if they’re not already owned.
Dividend Growth – If we could choose only one theme to follow this year it would be favoring companies with a strong history of not only paying dividends but increasing them consistently in recent years. Ideally, we’re looking for companies that are increasing their dividends by double digit percentages over the past five years. Companies that stand out are Disney, TJ Maxx, Oneok, Inc., Allstate, Baxter International, Intuit, Lockheed Martin.
Election Year- Of course one of the biggest uncertainties of 2020 is the presidential election. Although there is no way to predict the winner of the 2020 election, we know that incumbents do have an advantage. Trump has raised significantly more money, and the impeachment proceedings in the house did not appear to swing independents. To the contrary, its handling gives Trump a bludgeon to wield in the upcoming race. For now, we’re assuming four more years of Trump and thinking of names that benefit from his reelection. Those would include Aerospace and Defense, as well as Energy. Lockheed Martin, Northrup Grumman, Chevron, Oneok, Inc., and Valero. Should a Democrat win, look for strong sectors to be Clean-Tech, Med-Tech and Business Services as regulations change. Companies within these sectors include First Solar, Tesla, Johnson Controls, and Automatic Data Processing. Also, defensive safeholds such as Consumer Staples and Utilities would probably be outperformers. Examples within these sectors are Walmart, Dollar Tree, Xcel Energy, and Nextera Energy.
Minimum Volatility Stocks – Typically favored as a late market stage strategy one of our core research firms (Argus) believe that research and historical returns suggest that this strategy produces over time market-matching absolute returns and superior-to-market relative returns on a risk-adjusted basis. Companies that fit into this strategy have low betas meaning their price movement fluctuates less than the market as a whole. Potential winners in this segment are AT&T, Comcast, Johnson and Johnson, Eli Lilly, Northrup Grumman, American Electric Power, Xcel Energy, Medtronic.
Sustainable Investing – Over the past decade this strategy has exploded in popularity and assets. Originally referred to as Socially Responsible investing focused primarily on excluding companies that did business with South Africa and avoided alcohol, tobacco, and firearms companies. Over time, more companies were avoided including fast foods, oil and gas, and soft drinks. Now the strategy focuses on proactive impact investing more than reactive company boycotts. Sustainable Investing attempts to identify and support industries and companies that have an impact on climate change, hunger, poverty, disease, shelter and workers’ rights. Companies that promote and/or are found in Sustainable Investing Portfolios include JP Morgan, Lowe’s, PNC, Waste Management, Merck, Microsoft, and Norfolk Southern.
Housekeeping
Finally, a quick state of the business update. We look to 2020 to be a year of significant change in our practice. We’ve transitioned to a new investment reporting software package and are currently in the training and rollout phase. We had hoped to be ready to run reports by Jan 1st, but the year-end holidays slowed progress down. We’re now shooting for the end of January for integration completion. We’re excited to present the new Performance Reports as they are of significantly higher quality and detail than the old “Fidelity” performance reports.
Due to the overwhelming amount of mail we receive we have added a new address to help us handle the volume. Please make note of our new address:
Monarch Asset Management
7282 55th Ave. East #166
Bradenton, FL 34203
If you’re wondering why we receive so much mail we elect to receive all of our clients’ annual reports, quarterly updates, and corporate actions for over 1800 individual securities rather than have those delivered to your mailbox. We do not and cannot receive proxy voting notices, but we try and shield you from the rest. If anyone would rather receive those reports, updates and actions please let us know and we’ll be more than happy to have Fidelity send them your way!
Finally, a short discussion on fees. Entering our eighth year of business we have never raised our fees. With over twenty years in fiduciary management for large banks my experience is they “review and adjust” fees about every four years on average. We too have spent a good amount of time reviewing our fees and would like to share the following update. We have no intention of raising our fees, ever. While the cost of business is constantly rising, we honor our commitment to you and bear the burden of offsetting rising costs by uncovering new clients to offset expenses rather than asking you to pay more. To the contrary, for our existing clients we are announcing the rollout of “free” accounts under $25,000. Because of Fidelity’s switch to no-commission trading (exceptions may apply) for all accounts in which we may utilize funds or ETFs we’re delighted to waive our management fee on smaller accounts. Perhaps you’ve been thinking of funding a small account for a grandchild, or have a little IRA stuffed away somewhere? One of the major factors affecting an account’s long-term growth is fees and we’re simply waiving ours for new, smaller accounts. To find out more please contact us.
We wish you and yours a peaceful, healthy and prosperous New Year!