Year in Review • 2017 Archive

Bull Markets & Old Age: The 2017 Review

Happy New Year! 2017 saw the S&P end up 21.83%. In light of such a strong showing, I’ve been asked if the rally can continue. In short, my answer is yes. From an economic perspective, indicators like Auto Sales and Housing Starts are near cycle highs. Historically, even when they peak, recessions tend to be about a year off.

We’ve all heard the saying, “Bull markets don’t die of old age and they don’t die because of valuations.” Usually, their demise is the result of an economic downturn or an exogenous shock. The former doesn’t seem to be in the cards, and no one can predict the latter.

The 2017 Scorecard

Volatility & Resilience

2017 saw near-record low volatility with only 8 one-day moves of +/- 1% (the last time that happened was in the mid-60s!). The resilience of this market is best seen in the length of time between pullbacks:

• 📉 409 Days without a 3% pullback
• 📉 539 Days without a 5% pullback
• 📉 676 Days without a 10% pullback (2nd longest on record)

With that being said, the market seems to be in a position to have another good year. As always, please feel free to call with any thoughts or questions.

Market Strategy • Psychological Perspective

Embrace the Suck: Investing in Periods of Fear

The S&P 500 was down 4.38% in 2018—the first down year since 2008 and the worst December since 1931. However, I believe fear is a useful and necessary aspect of investing. There are two types of fear: the fear of missing out, and the fear of losing too much money.

The Valuation Quandary

Going into 2019, the market is cheaper than it was in the middle of 2018. When we look at forward multiples, the gap between equities and bonds is striking:

Technology deflation is affecting the relationship between the Federal Reserve and Inflation. Whether it is Amazon in retail, fracking in energy, or fintech in finance, new technology is putting downward pressure on prices, keeping inflation in check. All this seems to be creating a quandary for the Fed.

2019 Outlook: The Dovish Pivot

The world’s two biggest economies are simultaneously undertaking more dovish monetary policy. China is boosting markets with govt bonds and less stringent lending, while the Fed has backed off ‘auto-pilot’ to be more patient and flexible. This should be a significant tailwind for risk assets which have become inexpensive by historical standards.

Selling into a downdraft has never been the right thing to do. The market is one giant complex neural network which adaptively incorporates the collective expectations of investors. In due time, I believe investors will regret not adding more capital to these investments.

Equity Research • Portfolio Commentary

High Conviction: Navigating the Tech Landscape

Market Insights • Archive Perspective

Crossing the Rubicon: A Digital Proof of Concept

The liquidity provided by the Fed has been a catalyst for higher prices, backstopping debt markets to ensure they run smoothly. But I don’t believe the market is as strong as the headlines make it seem. The S&P is being driven by a handful of names.

Many stocks are 25%-50% off their highs. Unfortunately, the stock market doesn’t capture the real damage that’s being done to small businesses not in the index.

COVID-19 as a Digital Catalyst

In my mind, COVID-19 has become a ‘proof of concept’ that the world can live its life digitally, at scale. Grocery shopping, working from home, education, and e-commerce have all simultaneously become part of our collective digital experience. We’ve crossed the Rubicon; the shift has been accelerated and is just beginning.

Fortunately, we were positioned for this. Many of our investments provide the tools needed to enable the shift. Companies like ServiceNow, Nvidia, Shopify, PayPal, and Square are all poised to benefit from this shift, which is still nascent.

Bonds vs. Equities: The Yield Trap

Giving the government money for ten years and getting back 60 basis points is not very exciting. In fact, its real return is negative. As an asset class, bonds could be more dangerous than equities.

Equities as an asset class will play an ever more important role in allocations. Companies that enable the transition the world is undergoing will do well despite the economic turmoil. I’m sure there will be more volatility, but over time, stocks will move higher.

Market Strategy • Vision Archive

A World of 1’s and 0’s

What words are there to describe 2020 that haven’t already been exhausted? Instead of rehashing what was, I want to focus on what will be. Artificial intelligence, deep learning, cloud computing, and neural networks will underpin colossal growth in the global economy over the next 10-20 years.

Microsoft’s Satya Nadella recently noted that we are witnessing the “dawn of a second wave of digital transformation.” IDC estimates that worldwide spending on digital transformation will exceed $7 trillion by 2024. AI will impact every vertical—from Finance to Healthcare to Aerospace. It is the revolutionary element of the digital era.

The Digital Transformation of Cash

Not only are enterprises going digital, but so is cash. Currency is undergoing an analog-to-digital transformation. China has already completed the infrastructure for its digital currency (DCEP), and even the U.S. Federal Reserve is discussing direct digital accounts for Americans.

The Most Important Thing: Edge

Making outsized returns is not easy. You have to buy right, and then you have to hold on. In a world of millisecond algorithmic trading, having an investment horizon of more than a few weeks is a competitive edge. Long-term ownership is a deterrent to making mistakes.

Big winners do not go straight up. Daily stock movements are mirages that tempt us from our path. As Thomas Phelps wrote, “In the stock market, evidence suggests one who buys right must stand still in order to run fast.”

Economic Perspective • Early 2022 Archive

The Fed’s Balancing Act: Inflation vs. Growth

Seemingly every day, banks are forecasting more rate hikes for 2022. Higher rates are clearly having a negative effect on growth companies, so it’s worth discussing. In fact, just yesterday, Goldman predicted four hikes this year! They could be right, but I’ll take the under on that.

Supply Chain & Inflation

Powell has been able to talk rates higher by promising hikes. But listening to his congressional testimony, supply chain issues are playing a big part in their decisions. If supply improves while demand slows, that could take pressure off of rising prices.

Understanding the Data

PMI is a reflection of factory activity; this number reflected a slowdown in new orders. Prices paid also eased to 68.2 vs 82.4. Velocity is indicative of consumption—slower velocity means less consumption. Money supply also slowed significantly. Again, this should help moderate inflation growth.

Another often discussed driver of inflation is used car prices. According to the Mannheim Index, used car data indicated a 1.7% decline in December. More balance equates to price depreciation. Retail supply ended December at 54 days (vs 114 at the peak). Wholesale supply ended at 33 days.

The Path Ahead

Lastly, the dollar has been very strong over the last six to seven months. A strong dollar could have a cooling effect on commodity demand, another reason inflation may slow. Inventories are building and delivery times are shortening.

Nonetheless, the businesses we own are not dependent on rates, but a quickly digitizing world with verticals such as the Metaverse, AI, and blockchain playing a foundational role in how the world is changing.

Market Commentary • Archive Insight

Technology and the Illusion of Stability

The first six months of 2022 witnessed the worst start to a year for the S&P 500 since 1970. It was the third worst start to a year ever! We are besieged by a litany of woes, but within this cataclysmic tableau, there is one fact we have come to understand: the world is becoming more digital, and faster than we realize.

Technology and Digital Transformation

I think it’s important to step away from the incessant streaming of data and consider what it means to own equity in an enterprise. As noted investor Ron Barron recently wrote, “This is a HUGE once-in-a-generation BUYING opportunity.” I couldn’t agree more.

We’ve Seen This Before: Lessons from 1994

In 1994, the Fed raised interest rates five times. It was an aggressive, jarring cycle that deflated risk assets. But simultaneously, the Internet was rising. Once the Fed completed its cycle, markets focused on potential. From 1995-1999, the Nasdaq 100 returned a roughly 55% annualized rate of return. We believe the AI economy is sure to supplant the mobile economy (Internet 2.0) in much the same way.

Imagination and Long-Term Investing

Most view markets as a quantitative endeavor overlaid with human emotion. But imagination is an overlooked factor. The future is always in motion; real opportunity lies in imagining what is to come. That is where fortunes are made—in the transition.

AI, the Metaverse, and Emerging Technologies

PwC estimates that the AI economy could add $15 trillion to GDP by 2030. By lowering costs and increasing productivity, AI will touch every aspect of industry. That’s why I believe Nvidia and Tesla, leaders in the development and usage of AI, can become the largest companies in the world by market cap over the next five to ten years.

Positioning and Portfolio Philosophy

Strategically, our portfolios are well-positioned as the world moves further into the digital realm. Take Roblox: for July, the company reported 58.5 million Daily Active Users—an all-time high. Anything that is built will be visualized; anything that moves will be autonomous.

Market Commentary • January 2026

Back to the Future

2022 was a challenging year for KDM and its clients. 2023 was exactly the opposite. (Well, not exactly the opposite, but a vast improvement!) We experienced vastly different markets, emotions, outlooks, and outcomes. The emotional toll was the worst I ever experienced in 2022. It was not matched to the upside in 2023.

Nonetheless, the suffering created by the downturn in 2022 and the exuberance of 2023 nicely illustrates the manic behavior of investors, expressed via the markets and the constant search for stable ground. Much of the pain associated with sell-offs results from grasping for stability. Stability that doesn’t exist.

Investor Psychology and the Illusion of Stability

Stability is something we are hard-wired to strive for. It’s not a desire we can overcome but diminish. Focusing on owning businesses and managing portfolios for the next ten years and not ten months is a valuable tool in handling the constant volatility we face today.

All this is to express gratitude to my clients for being like-minded, long-term, and patient. KDM is fortunate to have many excellent, committed, and thoughtful investors. But I still have to make you money! To that point, I’d like to share a few thoughts from my market letter on September 9, 2022.

Lessons from 1994: History, the Fed, and Tech

Once the Fed completed its rate hike cycle in the 90s, markets began focusing on the potential and opportunity of what the Internet could produce. As a result, from 1995-1999, the Nasdaq 100 saw staggering returns. $1,000 invested on 12/31/1993 in the Nasdaq 100 would have grown to $9,332 on 12/31/1999—a roughly 55% annualized rate of return.

The AI Economy: The Years Ahead

Today, the AI economy is sure to supplant the mobile economy (Internet 2.0), which superseded the first iteration of the Internet. Eventually, investors will begin looking past CPI data, rising rates, and all things Fed. They’ll start to focus on the growth opportunities of the AI economy. And once that happens, stocks could surge, like the mid-90s.

Much in the world has changed since I wrote that in 2022, but my outlook on the path ahead has not. We are positioned for a mid-to-late-nineties-type stock market move over the next several years. But, it will not be without challenges, naysayers, and second-guessing. As I said, there is no stable ground!

I look forward to our continued journey together.