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Cautious Optimism

Updated: Jul 20, 2023

The stock market crash of 2008 scared the bejesus out of an entire generation of investors. Millions of people vowed to never rely on the stock market ever again and spent the next decade thinking that the next Lehman Brothers was hiding behind every tree.

From December 2007 to December 2018, investors withdrew more money from U.S. stock mutual funds than they put in, while $100 constantly invested in the Russell 3000 Index over that period more than doubled in value. So, to me anyway, it’s quite remarkable that the market could collapse this year more than 35% and the reaction was pretty much the exact opposite to when it did that in 2008-- instead of a mass exodus from the stock market, we got a speculative mania and a new generation of investors who all piled into the stock market at once.

Fundamentally, I’m not sure the risk calculus supported all of that unbridled bullishness, but it sure worked-- it was the single fastest recession ever from peak to trough.

Earnings season kicked off last week, and consensus estimates are currently calling for S&P 500 Q3 earnings to drop -21% versus last year, with earnings in every sector expected to contract.

It hardly looks like some wonderful banner year to start investing in stocks for the first time, does it?

I guess everybody’s in now, though, so I’ll just go ahead and lay out our rationale for cautious optimism:

  • While large tech companies in the U.S. dominate the global landscape, top-performing international companies continue to do well. Of the top 50 performing stocks each year, on average, more than 75% have been domiciled outside of the U.S. over the last decade. So far this year, 92% have been domiciled internationally. Macro and market conditions have been challenged this year, yet global opportunities have remained plentiful, and we believe that investors who can identify high-quality companies with strong balance sheets, earnings potential, and profit margins may benefit from expanding their portfolios’ borders.

  • Large tech companies are probably more defensive than we might have thought a few years ago, for they have ample liquidity and are more insulated from negative earnings revisions due to less cyclical business models. For these reasons, we think they’re likely to continue to do well.

  • The Russell 2500 index composition of small- and mid-cap growth stocks is heavily weighted toward information tech and healthcare, which comprise ~60% of the index. We think the decade ahead will increasingly be disrupted by technology and that small- and mid-cap growth stocks are poised to benefit from such a secular trend. Some of our favorite industries are those most transformed by the digital revolution, including semiconductors in tech and biotech in healthcare.

Election-related volatility may very well dominate in the near term, but we don’t believe that the outcome will be disruptive enough to derail the recovery. In our view, investors should stay invested within a strategic asset allocation and risk management framework, as the U.S. economy may be at the cusp of another multi-year bull market. Broadening global exposure, balancing exposure to small- and mid-cap stocks (especially in semiconductors and biotech), and maintaining adequate cash balances for buying dips are all highly doable strategies that we think will be helpful in the coming years.

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Out of the night that covers me, Black as the pit from pole to pole, I thank whatever gods may be For my unconquerable soul. Twenty years ago, in June of 2004, I founded a company called Bebaas, Inc.


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