Annual Update: 2020 – Bobbo Jetmundsen
Professional money managers got scared, wealthy investors got scared and the market sold off with the unknowns of Covid earlier this year. Today, the markets are making all-time highs. Contrarians and value-oriented investors like us have suffered owning good, but mostly under-performing stocks. Small caps (using the Russell 2000 index) have just reached the level they were two years ago and are performing well. Large cap value stocks like Intel, Bank of America and Coke have been stalled while the fast growth NASDAQ stocks zoomed. This is bound to change….and while I thought this a few years ago, it finally slowly seems to be happening.
Let’s think about the world today. Office space, due to Covid, reminds me of the racks of servers hosting software that companies stored in-house years ago. Employees are now being hosted in the ‘cloud’ (home) and offices are going to be empty or transformed into more spacious and likely glamourous spaces like what we see when we look at Apple or Google’s campuses. Reconfiguring the home office to accommodate the cloud employee is underway. The first wave is obvious…technology. But the next wave will be something else, likely involving social meetings and safe gatherings for brainstorming sessions, possibly even in exciting and compelling locations. New apartment buildings will cater to the home office, and the shared economy will continue to flourish. Virtual filing cabinets and white boards that are secure and easily accessed will make the remote employee engagement safe and quite functional. Companies will downsize some areas and expand others. My guess is that this will be very profitable over time through cost savings, but also challenging for protecting IP. Security of the trade secrets will be paramount. We own a top Sunbelt office-space-oriented REIT that has had little loss of revenue from tenants and should continue benefiting from corporations looking to expand in these popular southern states. Also, we are looking for niche technology security companies focused on the enterprise and have a small position in one already.
We hear about taxes going up on the wealthy and yet the market continues to into new highs. Either the market does not care, or the market expects the future is bright regardless of policy. International investors and pension funds which account for a large portion of the invested capital are not taxed, so that might be a factor. In addition, with fixed income securities interest rates at extreme lows, the same pension funds might find they want to own more equity investments. Lots of cash is on the sidelines (see chart and commentary from Bill Rhyne at Croker-Rhyne Co, Inc.) so in the next sell-off I suspect buyers will once again show up resuming the upward bias for the market. Unemployment is up to 7% (historically, not horrible) and if that improves a little, this might add to the strong performance of stocks next year. Gold and silver had a brief run, and now are digesting as the growth mega cap stocks continue to grab more attention. Printing money to save the economy will have consequences and a weak dollar is usually to be expected, which benefits these metals.
The Dow Jones Average hit 14,000 in 2007. Think about that, today it closed at 29,500 after gaining 3,000 points in about the last month. Maybe it was overpriced before the Great Recession, but with the big runs in the growth stocks since then, it has only basically doubled in 13 years from those levels. Furthermore, the current level of the Dow is less than 3x its level in 1999-2000, and the overvaluation of the NASDAQ compared to the S&P 500 is nearing the extreme seen during Dot Com Bubble (see chart). We are confident that this spread will narrow over time, benefiting the types of securities we search for in the markets. We have been constructive on the equity markets since our founding in 2006 and remain that way today. Opportunities abound.
