4th Quarter 2020

At the dawn of a new decade, the global economy is changing rapidly with the rise of the services sector. The world’s Gross Domestic Product (GDP) accounted for by services is experiencing a sharp increase in developed regions and especially emerging economies, such as Sri Lanka and Brazil. This growth in services has not only transformed the make-up of the world’s economic production but has altered trading patterns. In the U.S. economy, the services sector (a broad category of the economy that includes technology, media, financial services and transportation) is, by far, the largest contributor to GDP, accounting for nearly 70% in 2018. This contribution has rapidly accelerated in recent years as value added by service producing industries now accounts for 79% of total growth in GDP.

The fusion between mature manufacturing and service companies with intangible assets, such as digitization and software, are creating new and accelerated growth opportunities and value
to shareholders.

Even more transformative is the growing nexus of physical (tangible) products and digital (intangible) technologies, which is revolutionizing what manufactured products can do and contributes to a renewal of their value and place in the economy. Examples abound and include Smart TVs that are networked for streaming, exercise equipment that comes with videos or live streamed instructions, cars with navigation systems, printers with ink jet replacement subscriptions and so on. The takeaway is that investors have a much broader choice in incorporating technology into their portfolios and, as a result, it is a misappraisal to define technology representation as consisting exclusively of companies in the tech sector. Traditional companies with dynamic management have embraced this paradigm shift, reversing and extending the lives of their maturing products and creating new shareholder value. Companies that embrace the rise of services are creating jobs and wealth, and they are making products we rely on more efficient.

4th Quarter 2018

Concerns of increasing debt levels, tightening monetary policy, technology stock valuations, potential trade wars and slowing eurozone growth coalesced in the 4th quarter to fuel a higher level of volatility. At nine-and-three-quarter years, the bull market is the longest on record and one of the best performing. The S&P 500 has risen 333% from its bottom in 2009 to its most recent peak before the 4th quarter turbulence.

Some market pundits question whether the bull market will make it to its 10^th birthday in March 2019.  Investors seem nervous about its longevity. A bull market doesn't technically end until there’s a bear market resulting from a 20% drop from its peak. This particular bull market is unusual in that it followed the 2008 financial crisis, which was so severe in that it was second only to the Great Depression in US history.

Extended volatility can offer a window to buy solid companies at reduced prices since the herd behavior of bear markets often depresses prices below their long-term economic value.

The good news is that the global economy still shows signs of robust health. Gross domestic product (GDP) growth topped 4% in the second quarter, the best expansion since 2014, and unemployment at 3.7% is at a 49-year low. Rising interest rates also indicate an increasing demand for funds. Rates tend to climb when the economy is humming. A recent bank study found that companies’ price/earnings multiples expanded during half of recent rising interest rate cycles and contracted during the other half, indicating that the market is agnostic about a gradual change in rates.