During the third quarter, the stock market, as measured by the S&P 500 Index (S&P 500), posted a modest 1.70% gain, while the U.S. economy enjoyed a continuation of the recovery begun in 2009. Both achievements were remarkable, not so much for their extent, but because they happened in the face of some very serious uncertainties, including rising tensions in the Middle East, the U.S./China trade war, Brexit and Hong Kong unrest. All this uncertainty led to disruption and likely postponement of capital spending decisions, resulting in slowing global economic growth.

Adding to these headwinds was slower growth in China, a number of developing economies, and Europe. In fact, Germany may already be in recession. Despite growing uncertainty and slower international growth, the U.S. economy continued to expand, and the stock market inched ahead.

In response to the various risks to economic growth, the Federal Reserve (the Fed) cut rates another 25 basis points (0.25%) in an effort to keep the expansion alive — the second rate cut since the current round of easing began in July. Anemic inflation, hovering below the Fed’s 2% target, has given the Fed room to cut rates. In a nutshell, we would describe the third quarter as “lots of headlines,” but not much real change in the U.S. economy.

Our focus remains on industry leading or dominant companies enjoying robust tailwinds and facing the prospects of rising or, better yet, accelerating earnings and cash flow growth. While we believe buying leading companies in structurally advantaged industries can be a rewarding investment strategy, there are two important additional considerations: 1) the sustainability of a company’s competitive position and 2) a company’s valuation. In this age of rapid disruption, we are especially conscious of the first issue. Just consider Kodak, a once dominant company that is now virtually non-existent due to the replacement of physical film with electronic bits. Regarding the second issue, shares of Coca-Cola, the most dominant beverage company on the planet, have compounded at only 3.8% annually vs. 6.6% for the S&P 500 since June 30, 1998. The price one pays matters. As we have argued before, one of the reasons we are focusing on dominant companies is that we feel we are moving toward more of a “winner take all” economy. There are several reasons for this evolution. In some industries, scale economies come into play. In others, network effects dominate. In most, the ability to fund technological infrastructure capital projects enables leading companies to drive down their operating costs faster than their lesser competitors can, thus becoming more profitable and more capable of serving customers with either better service, lower prices, or both. Here are some examples: