By David W. Scudder

Aureus Co-Founder David Scudder recently wrote a paper on the state of capitalism in the 21st century. Please click the link below to download a copy.

Over the past five years, the S&P 500 Index (or “stock market”) has become increasingly dominated by a handful of mega-cap technology companies.  This new composition (and concentration) of the stock market has important implications for both active and passive investors, which we explore in this quarter’s Investment Perspectives.

One of the lasting lessons from the 2016 Presidential election is that polls and pundits can be wrong. While early, the 2020 election appears to be tilting in favor of the Democratic party – though, again, that would be relying on fallible polls and pundits. Regardless of the election outcome, we believe the current recession and pandemic response will lead to an expansion of government’s role in society, as it has with past major crises.


From an investment perspective, we are interested in exploring potential fundamental changes in policies, programs, and budgets that might accompany the election of one of the presidential candidates. In this piece we will look at three areas that may impact the investment landscape – taxes, trade, and government spending.

Over the past week, we have witnessed the market make a rapid about-face from “COVID-19 doesn’t matter”, to “COVID-19 might matter a lot.” This change of outlook has driven the market down ~11% on new fears of the coronavirus and its impact on global health and economies. The virus, which we were all unaware of a few months ago, represents a rare black swan event, now impacting world markets, economies, health care systems, government policymakers and individuals. While there is certainly plenty unknown about the virus and how it progresses from here, we would like to share some current thoughts.

In mid-August, the Business Roundtable, an influential trade group comprised of most of the largest US companies, announced that 181 of its CEO members had signed a new Statement on the Purpose of a Corporation. Given that the Roundtable last revised these articles over two decades ago, this shift attracted attention. The decision to update this statement reflects the growing expectation and demands by customers, employees, and influential institutional investors that businesses take on broader social responsibilities than has historically been the norm.

The initial public offerings (“IPOs”) of a few highly-recognizable businesses pushed the IPO market back into the headlines in 2Q19. Most notable among these were Uber and Lyft, two competing ridesharing businesses that are poster children for today’s “gig economy”. When IPO activity starts getting more media attention, it is often accompanied by suggestions that this must signal the end of an economic expansion as private company CEOs use a hot market to capitalize on the unsuspecting public’s desire for new issues. While it is true that IPOs usually occur during healthy economies, the cycle coincides more with strong markets because the reception of IPOs is anemic when the market is weak. In this piece we examine IPO volumes over the last 10 years and the state of the current new issue market.

In the first quarter of 2019, we officially passed the 10th anniversary of the 2008-2009 financial crisis market low, struck on March 6th, 2009 when the S&P 500 touched 666. As we mark this important, albeit distressing, event in history, we at Aureus want to take this moment to commemorate the crisis, but more importantly, look at what has happened since then.

Recently, the market downturn has dominated headlines in the financial press. While selloffs are to be expected in the equity markets, that doesn’t make them any less unsettling when they occur. This year, the market has experienced two 10% declines, the most recent of which began in late September. However, we have been witnessing a rolling bear market for much of the 2018. Over 60% of the 500 names in the S&P 500 Index have experienced declines of 20% or more from their 2018 highs at some point during the year. Many Metals & Mining, Construction, Industrial, Semiconductor, and Oil Service stocks have fallen over 25% from their 52-week highs.

Reshuffling the deck: The S&P is modifying the major categories of the market in the most significant reclassification of industry groups since the index officially adopted standardized sectors back in 2001. ‘Communication Services’ debuted as a stand-alone group on September 30th, representing ~10% of the S&P 500. This replaces the Telecommunications sector, which was absorbed by the new group, along with select constituents from Information Technology and Consumer Discretionary. The only other sector reclassification since 2001 was the separation of Real Estate from Financials in 2016.

Over the past several months the terms tariff and trade war have garnered increased attention in the media. President Trump is emphatic that the United States is engaged in several unbalanced trade relationships that require government intervention. To address these inequities, he intends to use tariffs to reduce trade deficits and expedite the renegotiation process. Tariffs are an inviting option as they can be applied in very targeted areas/products and do not require Congressional approval. Against this backdrop, we felt that this was an opportune time to discuss tariffs and the implications for the US economy.

The US has run the world’s largest trade deficit since 1975. In 2017, we imported $2.4 trillion of goods and exported $1.6 trillion, leaving a trade deficit of $810 billion. The table below, derived from the US Census Bureau, shows the five largest trade deficits and the trading partner.