ECONOMIC/MARKET REPORT
ANALYTICAL CAPITAL
JUNE 18 2017
Remember the old Chines “curse:” “May you live in interesting times?” Well, we are living in interesting economic times. And depending on how your investments are positioned, it will turn out to be a blessing or . . . a curse.
The U.S. is in the middle of a business cycle. It always is, in one stage or another, but this one is unusual. Because at the same time, the economy is undergoing secular change. The fact that we are in an economic cycle within a long-term structural economic shift makes it very hard to disentangle the two dynamics and, as a result, doubly hard to properly position an investment portfolio.
The current business cycle is said by many to be long-in-the-tooth. After all, the last recession ended nearly eight years ago. (The average duration of an expansion in the U.S. has been about five years.) If so, a macro-economic downturn is imminent, at least according to historical precedent. Corporate profits, as a result, should recede and bring equity prices down along with it. Perhaps. But consider this. In past expansions, GDP growth averaged 4.25% per year. With a length of five years, GDP posted a cumulative compound growth of 23%. The growth rate dung the current cycle is, at best, 2%, adding up to 17%. So, we still have 6% to go, just to remain average! Please understand. I don’t fancy myself a forecaster. And I don’t mean to imply that the past is an accurate guide to the future. There is too much variation in human behavior and in the evolution of institutions for the past to be reliable. My argument is simply this: if one does rely on the past, the future is not as dismal as conventional wisdom has it.
What about the secular shift? The technological revolution is not over. Every time we think it is, along comes a new invention that produces a profound change in society. Furthermore, existing technology has not been optimized. Hence, in our opinion, there are still rewards to be reaped from investing in the technology sector, be it venture capitalists and private equity, or “mature-stage” investors such as ourselves who become partners with these companies via purchasing their shares in the market. To be sure, there will be ups and downs in this sector – see the above paragraph – sometimes violently so, as the technology sector seems to exaggerate the volatility in the stock market at large. But long term investors will be rewarded.
Where does this leave us at Analytical Capital? As you know, we are value-based, fundamentally driven investment managers. We take the longer view and try not to be infected by market hysteria. Indeed, as you see by your account’s transactions history, we attempt to capitalize on the extreme market movements – in individual stock and in the market as a whole – which often present opportunities to go in the opposite direction. Last week’s decline in the leading technology stocks was a prime example. We selectively added to positions. This approach has, thank G-d, served us well over the years. Those
of you who have been with us for a while have enjoyed handsome increases in your portfolios’ values. And we have accomplished this with much less risk than normally expected to accompany such returns. We can’t guarantee this will recur. But we’re confident that our investment philosophy combined with our analytical methodology is the correct way to try.
