To Our Investors and Friends,
The S&P 500 retreated in February by 1.4% on concerns of a cautious consumer and a deteriorating economy. In a classic flight to safety, the 10-Year Treasury Note dropped 24 basis points, to end at 4.24%. The 2-Year Treasury Note fell 23 bps through the month to end at 3.99%. Oil fell 3.8% to $70. Cyclical areas in the market retreated, while interest rate sensitive sectors advanced. Interest rate sensitive areas helped the Russell 1000 Value Index squeak out a modest 0.4% gain, while cyclical declines led the Russell 1000 Growth Index to fall 3.6%, the Russell 2000 Value Index to drop 3.8%, and the Russell 2000 Growth Index to sink 6.8% in the month.
US consumers have been suffering for years now, as inflation has taken away their purchasing power and wage growth has not kept up. As a result, recent University of Michigan consumer sentiment surveys indicate a drop in consumer confidence over the last several months and a subsequent increase in inflation expectations over the same time frame. The average consumer is feeling poorer as the stock market makes new highs, a significant disconnect that is a challenge to future economic growth. This is not a new phenomenon, but we believe this sentiment has been brought to the surface with higher inflation.
As can be seen in the chart below, the top 10% of earners accounted for 36% of spending in 1994. By 2024, the top 10% made up 50% of spending. The concentrated level of income and spending that has been bolstered by a strong stock market adds fragility to our economy.
According to Nobel laurate economist Joseph Stiglitz, “The growing inequality in our society undermines the strength of the American economy." Ultimately, economic growth will slow if only a small portion of the population can afford to spend on anything beyond food and fuel. We believe the economy would be far better off if the middle class had greater spending power, which would increase demand for durable goods such as housing and cars, fostering a more resilient economy.
At Kingsland Investments, we seek companies that both empower their employees and share in the wealth of their growing businesses. Shared prosperity leads to a virtuous cycle of growth. We are continually on the lookout for such companies and will seek to discover and own them as they emerge.
All the best to you,
Arthur K. Weise, CFA