The first half of 2020 ranks as one of the most fascinating of my lifetime. We’ve experienced one of the sharpest bear markets in history, governments shutting the world down over fear of the C-19 virus, and civil unrest. I don’t recall a six-month period in my life that’s given the talking heads of the 24-hour news cycle so much to focus on.

We will leave most of what’s going on to others to discuss. In this letter, we review the public markets over the last six months and several years, and we offer observations about the future. We look at both domestic and international markets, and both stocks and bonds, and will use indices from Standard and Poor’s, Wilshire, and MSCI. Finally, we evaluate domestic large and small cap stocks from both a growth and value style, international developed and emerging markets, again with a growth and value style, and government and corporate bonds.


The economic shutdown has caused federal spending at an unprecedented pace, with spending now measured in increments of $1 trillion, whatever that is. The approach to federal spending over the last 90 years has been that federal debt could goose the economy, causing an uptick in GDP growth which would be greater than the debt. Over the last forty to fifty years, and especially the last twenty years, we have seen a diminishing return, in terms of GDP growth, on federal spending.

And then this shutdown. The trillion here, trillion there approach of 2020 isn’t designed to spur growth. It is designed simply to maintain the status quo, and in this observer’s opinion, to assure the re-election of whoever can promise the most cash the fastest to the greatest number. Modern Monetary Theory, or MMT, suggests that the federal government can print and spend money indefinitely and indiscriminately and that the Federal Reserve can buy debt indefinitely, and we will all just roll merrily along, with no economic consequences. MMT is a theory desperately in need of a solid foundation that can only be discussed with a straight face by those with no meaningful real-world experience.

For those who are willing to be aware, and discern the times, however, opportunity always exists.


What we have witnessed since the Great Recession of 2008-09 is the dominance of a handful of growth stocks. The names, Facebook, Google, Amazon, Apple, Microsoft, Netflix, are familiar to us. These six stocks represent 1% of the S&P 500, yet are responsible for 21% of the returns. Market dominance by a handful of stocks is not a new phenomenon. And new technologies often lead the pack. During the ‘60’s and early ‘70’s, it was IBM, GE, and what is now ExxonMobil. However, the last time we had this level of concentration was 1999.

To put the divergence in context, the S&P 500 is off 4% YTD, while the cap-weighted index, known as RSP, is off 14% YTD. Further, as noted below, the S&P 500 Value Index is off 16.7%, while the S&P 500 Growth Index is up 7.3%. Let’s look at specifics.

Domestic Stocks

Large cap value stocks as measured by the S&P 500 Value Index are off 16.7% through June 30, 2020, and up an annualized 1.15% over the last three years, 3.2% over the last five years, and 8.20% over the last ten years. Large cap growth stocks as measured by the S&P 500 Growth Index are up 7.3% YTD, and up an annualized 15.61% over the last three years, 13% over the last five years, and 14.9% over the last ten years.

Small caps? They have underperformed large caps. As measured by the Russell 2000, off 13% YTD. Small value, as measured by the Russell 200 Value Index, is off 23.5% YTD, and off an annualized 4.35% over the last three years, though in positive territory to the tune of 1.25% annually over the last five years. On the growth side, the Russell 2000 Growth Index is off 3% YTD, and up an annualized 7.86% over the last three years, and 6.86% over the last five years.

International Stock

In developed markets and economies, growth outperformed value, and large stocks outperformed small stocks. For example, the MSCI World ex US Small Cap Index is off 12.87% YTD, flat over three years, and up 3.56% annually over the last five years. By comparison, the MSCI World ex US IMI Growth Index is off 3.4% YTD, up an annual 5.73% over the last three years, and up 5.41% annually over the last five years.

With emerging markets, the story is much the same. Growth outperformed value, and large outperformed small. The MSCI Emerging Markets Small Cap Value Index is off 17.3% YTD, with negative annual returns of 4.27% over the last three years, and 0.61% over the last five years. By comparison, the MSCI Emerging Markets Growth Index is off 1.52% YTD, and up an annualized 6.19% over the last three years, and 6.35% over the last five years.


One-month U.S. Treasuries remain the world’s safe haven, with YTD returns of 0.40%, and annualized returns in the 1% to 1.5% range over the last several years. Intermediate and long U.S. Treasuries are up 8.7% YTD, with three and five-year annualized returns in the 4% to 5.5% range. With international bonds, it’s much the same story.


We expect continued market volatility, though solid long-term results. History suggests that the bear market bottom we experienced in March will be revisited this year. Our crystal ball is broken, so we don’t know. Fed interference in the public markets distorts values and increases the challenges in interpreting market behavior through the lenses of fundamentals, opportunity, and sentiment. One researcher, however, has said that for the Dow to reach 100,000 by end of the century, it would need just a 4% annualized return.

Next 20 Years?

The year we have had so far has given the opportunity to speculate on what may happen. The following falls not in the category of prediction, but more in the category of things which wouldn’t surprise us.

Social Security

It wouldn’t surprise us if Social Security taxes increase to 9% or 10% of payroll, for both employee and employer, with the wage base continuing to increase much faster than the inflation rate. The cost of Medicare is already means-tested, meaning the higher your income in retirement, the more Medicare costs. Look for Social Security benefits themselves to be means-tested. The political cost is small, the political win is significant. And, look for Full Retirement Age or FRA, to continue to go up. It wouldn’t surprise me if those born 1980 or later have FRAs starting at age 75.

Retirement Plans

It wouldn’t surprise us if the government, through the EBSA unit of the DoL, mandated that all retirement plans hold some percentage of government bonds. And that these same governing agencies offer safe harbor guidelines requiring an employer who sponsors a retirement plan to have some liability for employee retirement outcomes.


It wouldn’t surprise us to see the economy struggle to grow at more than 2% annually, with concepts such as rent controls and universal basic income becoming more mainstream. Government loans to business, via PPP and other means, and the Fed’s creation of an SPV to purchase commercial paper, and its subsequent decision to buy risk assets, will continue, as we go down this path of muddy relationships between government and business. Remember – whoever has the gold makes the rules.


It wouldn’t surprise us to see the deductibility of charitable contributions become more limited, or go away, as our culture moves toward an environment where the state is the ultimate provider. Nor would it surprise us to see real estate owned by churches become subject to property tax.

Where We Live

It wouldn’t surprise us to see those who can gravitate toward larger single-family homes, often designed for more than two generations, and with space to isolate, rather than living in high-density, multi-family units. Those with fewer options financially will remain in smaller high-density residential environments. And of course, any number will choose the RV life as a lifestyle.

Politics And Privacy

Within twenty years, all the Greatest Generation, and many of the Boomers will be gone. Millennials will be in leadership positions, and it is likely one will be president. Concepts of privacy and confidentiality will change dramatically, as will the expectations of the social contract between government and citizens. Technology will continue to disrupt, and create new ways to communicate, work, and live in the community. The U.S. will continue to attract the best and brightest from around the world.

These changes will cause significant tension between generations, due to differing expectations. We continue to believe though, that the best is yet to come.

Summary and Preparation

Again, these are simply things that wouldn’t surprise us. We don’t know what the future looks like, though we continue to be excited about it. Preparation? Choose peace over fear, as fear disables. Financially, maintain a reserve, automate good habits, and choose to be generous with your time, talent, and treasure. These principles are timeless. And, expect and learn to embrace change.

As with everything we write, we invite your comments, input, questions, and challenges to our thinking.