Shocking as it may be, Barack Obama is still the President of the United States. Don’t feel bad if you’re shocked; President Obama may have been caught wondering himself. There is no telling how the President-elect feels about the subject, though subdued humility would be somewhat unprecedented.
As the efficacy of monetary policy on financial markets wanes, hopes are high for a significant influx of money from fiscal policy (lower corporate and individual taxes combined with a lot of spending on programs like infrastructure and defense, and a substantial reduction in regulations that are seen as restricting business.) New policies like these and gushers of new cash should absolutely drive economic growth and share prices. Higher growth could last for a couple of years at least. The goal is that this infusion of cash will stimulate a recovery that will become self-sustaining and no longer dependent on future streams of borrowed government cash. And it may work. And it may not. It may work just a bit. Whether it works or not, the certain outcome is more debt. A lot more debt.
It’s never nice to throw cold water on the kids’ honeymoon, and I feel a bit guilty. A couple of truths merit consideration:
- The current rally is driven not by improving fundamentals. It is rallying on hope of better conditions sometime in the future.
- Prices are rising on hopes and expectations that fundamental growth will materialize to support these higher prices. It may, but it hasn’t.
- The current Trumphoria is ignoring significant headwinds from already higher interest rates, a much stronger dollar, and higher energy prices.
- Bull markets are emotional; they embrace and champion good news and dismiss bad news. Bear markets do the opposite.
- During Bull markets, cautionary writers are dismissed as “grumpy” or “not getting it.” Are you thinking that ‘Farr is sounding grumpy?’
- Tax relief and new spending can’t begin until President Trump and Congress work through the sausage-making and horse-trading of the legislative process. Actual changes are likely at least a year away and, in many cases, proposed changes could get watered down significantly. How will markets react when dysfunctional Washington reappears and investors are confronted with Republican internal disputes between the Tea Party arch-fiscal-conservatives conflicting with those who want to spend now?
- Even when changes are enacted, there is a 12-18 month lag before effects appear in economic data.
Though it is all the rage to “sing a song of cheer again,” I find myself feeling cautious about the new emperor and his new clothes. Several of Candidate Trump’s economic proposals caused me great concern. While he sounds more moderate in many of his views, protectionism and trade wars will never be good for the US economy. I support the President of the United States always and everywhere, and fervently hope for his success in leading this greatest of nations, but it seems disloyal and un-American to simply become a glossy-eyed sycophant.
My friend and colleague Doug Kass from Seabreeze Partners wrote, “… it is important to remember that during the three-month period from the time Reagan was elected in November 1980 to his inauguration in January 1981, the market euphoria took the S&P Index 8.5% higher. However, the market fell dramatically from January 1981 through August 1982, declining by 28% from the 1980 election and by 20% from the 1981 inauguration.”
I remember the Reagan run-up, but I also remember Greenspan’s “irrational exuberance” comment at Dow 6,000 and the subsequent 8-month climb to 8,000. The late nineties taught me that expensive is in the eye of the beholder. My partner John Washington reminds us that trends always last longer than anyone thinks they will. This market may climb significantly higher, or a correction may be days away. NO ONE KNOWS. But, they never do.
My cautious feelings are born of experience and responsibility. Since my early days as a stockbroker enduring the ‘Crash of 1987’, I’ve learned how unpredictable markets can be and most always are. Unpredictable is the nature of markets. The responsibility to the many people who have entrusted me and my firm with their savings can’t be understated. Most mornings around 3:30 find me wide awake and thinking about a client or their family, a stock, an employee. Our business is very engaging intellectually, and clients want us to sound smart and erudite. Our most important responsibility is not sounding smart or being right about markets, it is being right for each client. It may be easy to see a speculative stock on an upward tear and benefit from the next few percentage point increase, but it’s hard to not buy the winner as it is winning because it is inappropriate for the 80 year-old retiree who cannot afford significant losses. We manage other people’s money and are responsible for protecting, defending and pursuing their interests – first, foremost, and always.
What Should We Do?
This may be the most frequent question I’m asked after I describe market conditions and concerns. The answer is to invest as you always have with a focus on a long-term horizon. Market timing DOES NOT WORK. Our firm is built on a bedrock of research. Strong balance sheets, experienced management teams, manageable debt levels, high returns on capital, and ample free cash flow are among our must-haves. 1987 was a market disaster as was the dot-com collapse and the 2008 financial crisis. Had you been so unlucky as to have invested at the highest point before those declines, you would have a lot more money today. Open eyes, healthy circumspect questioning, and an unwavering commitment to our clients and their needs will continue to guide our daily decisions.