To Our Investors and Friends,
April was a wild month that began with a tariff shock, inducing a market meltdown that slowly recovered as the initial tariff increase was toned down. In the end, having dropped as much as 11% intra month, the S&P 500 finished the month down .76%. The 10-Year Treasury was equally volatile, swinging as high as 4.48% before ending the month down 6 basis points to 4.17%. The 2-Year Treasury Note fell 29 bps through the month to end at 3.60%. Fears of both a global recession and proposed increased OPEC production drove oil down 15% to $60 a barrel. Value Indexes sank with energy, while Growth experienced mixed results. In fact, the Russell 1000 Growth Index increased 1.8%, and the Russell 2000 Growth Index declined .64%. The Russell 1000 Value Index fell 3.1%, and the Russell 2000 Value Index dropped 4.0%.
The market shock that came with the announcement of widespread tariffs on all global trading partners will be digested by investors over the next several months. We believe the US will be better off with more local manufacturing of strategic industries such as semiconductors but reshoring will prove quite a feat. The biggest hurdle to realizing this future is an intense regulatory environment that has decreased construction productivity meaningfully over the last 50 years, even while manufacturing productivity has materially improved. As can be seen in the chart below, single-family home construction takes almost twice as long as it did 50 years ago. For larger construction projects, completion is often measured in years. New York City residents can attest to this – it took nine years to construct a 1.5 mile subway segment along Second Avenue (completed in 2017) compared to just four years to construct the first nine-mile stretch of subway completed in 1904.
In their book Abundance, authors Ezra Klein and Derek Thompson explain that the reason the US ceased to lead manufacturing in the world has a lot to do with regulation that makes new construction difficult to accomplish. The authors state, “Lawyers constitute more than one-third of the House of Representatives and more than half of the Senate…when you make legal training the default training for a political career, you make legal thinking the default thinking in politics. Legal thinking centers around statutory language and commitment to process, not results and outcomes.” The authors further explain that “the problem we faced in the 1970s was that we were building too much and too heedlessly. The problem we face in the 2020s is that we are building too little, and we are too often paralyzed by process.”
At Kingsland Investments, we have largely steered clear of investments requiring significant construction of plant and equipment because building in America is incredibly costly and inefficient. We look forward to a time in which such investments make sense because the productivity of the final project makes for a high return on investment asset. Until this time, we will stick with high growth, low capital-intensive businesses that have dominated stock market returns over the last 50 years.
All the best to you,
Arthur K. Weise, CFA