Commentary

December 31, 2019

A Decade Review

 
January 10, 2020 marks the tenth anniversary of the founding of Beplat Asset Management.  Every year I write quarterly reviews on economic topics which I believe are interesting and worthwhile to study.  It is useful to look back over the past 40 reviews to judge the accuracy of my observations and commentary.
 
Economic context is important.  I never imagined that for the entire ten year period there would not be a single quarter where economic activity in the United States declined.  I never had to predict that a recession was imminent.  I believe this trend will continue and that the U.S. economy will not experience a recession in 2020.
 
Ordinarily when the economy expands, the demand for capital increases and interest rates rise as loan demand grows.  I thought the continuing large annual Federal Budget deficits over the past ten years would cause interest rates on U.S. Treasuries to rise.  Even though the S&P bond rating on U.S. debt was lowered from AAA to AA in 2011, interest rate levels remained low by historic standards.  I thought the rate on the 10 year US Treasury Note would be 4% by now instead of its current level of 1.75%.
 
There are several consequences that flowed from the sustained low level of interest rates over the last ten years.  First, it obviously benefited borrowers.  The number of homeowners whose outstanding mortgage balance exceeded the market value of their home declined drastically as the housing market changed from oversupply to scarcity.  At present, the supply of homes for sale, measured in terms of the months it will take to sell all of them, is at its lowest level in history, just over four months.
 
Secondly, low interest rates hurt savers, and especially those nearing retirement age.  As a result the number of people employed in full or part-time work after age 65 is at record high levels as a percentage of that age category.  I am pleased to be included in that group.
 
Bank stocks, retail stocks and energy stocks were all impacted negatively by changes in their respective outlooks from ten years ago.  I avoided investments in bank and retail stocks during this time, but I maintained positions in the energy sector.  Banks were hurt by regulatory issues that hurt their growth prospects and their profit margins.  Retail stocks were generally hurt by Amazon and the proliferation of on-line alternatives to malls and physical locations.  Energy companies struggled with low prices for both crude oil and natural gas due to the huge increase in supply that came from hydraulic fracturing technology.
 
The big winner over the past decade was the technology sector and that is reflected in the sector’s relative weight in market indices such as the S&P 500.  Technology currently represents more than 30% of the S&P 500 and is currently near its highest level ever within that index.
 
I thought the Affordable Care Act would negatively affect both health insurers and major drug companies.  I got that half right as drug stocks lagged the overall market for most of the last ten years.  Health insurers, on the other hand, soared, thus demonstrating to me that their lobbying efforts when the legislation was being written, produced high returns to their stockholders.
 
I resisted the recommendation to diversify investments into International Developed Markets and Emerging Markets.  I was dissuaded from these investments by an academic study that showed the investment result of such diversification worked when markets were rising but failed when markets were falling.  That strategy worked well for our client portfolios.
 
Sir John Templeton, founder of the Templeton Mutual Funds (now part of Franklin Investors), entitled his autobiography, “The Humble Approach.”  To be a truly great investor, as he was, requires humility.  It is my continuing goal to be clear eyed about investing and humble in my approach.  I am looking forward to the next ten years practicing that philosophy.
 


Raymond A. Beplat, CFA
Chief Investment Officer







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