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The World Turned Upside Down
April 11, 2017
The amazing popularity of the musical Hamilton has been a reminder of the legend that British bands played the music of “The World Turned Upside Down” as they surrendered at the siege of Yorktown in 1781 in the last major battle of the revolutionary war. Indeed, the world was turned upside down by the American victory and a new nation was born. Now, with the election of Donald Trump as president of the United States and signs of populism sweeping across Europe, many are asking whether our world has again been turned upside down and how political leaders will be reacting to this new force, the voice of the people and the future for democracy.
The initial reaction of global investors has been positive based on expectations that populist policies, if enacted, would stimulate economic growth and revive investor “animal spirits”. The Trump rally partially reflects the hopes of some investors that the promised fiscal spending, deregulation and comprehensive tax reform would provide a stimulus for stronger global growth and a positive boost for markets. Maybe so, but the patience of investors will be tested in coming days.
Leadership is important in most organizations but the lesson of history is that over time personalities and promises of kings and presidents have limited impact on the prosperity of their countries and their citizens. Adam Smith famously wrote in The Wealth of Nations that “an invisible hand” guides supply and demand and the prosperity of nations, not government policies. We would concur and add that innovation, technology, research and productivity are contributing much more to the prosperity of nations and individuals. It is also hoped that proposed changes will reduce the drag on growth that has come from the government. The first attempt of the republican congress to repeal and replace Obamacare was a failure. Now they will begin to work on the budget, attempting to tackle the agenda for tax reform and regulation simplification. Lots of luck with that!
Investors have taken a positive stance in markets since the election in November as the S&P 500 rose 12%, with only a 2% sell-off from the high in March. We feel that the sustainability of the market advance is dependent on the strength of the global economy and the expected increase in earnings. Our principal concern is the potential damage to business, consumer spending, and markets should a border tax and a trade war develop. Despite concerns, the latest reports show that small business optimism is at the highest level in more than 40 years and U.S. consumer confidence has risen to its highest level since 2000.
In these uncertain times investors are advised to have a margin of safety, considering the challenges faced by the new U.S. presidency including health care reforms, illegal immigration, and trade, among others. Other risks that must be analyzed include changes in policy by the Federal Reserve, the impact of Brexit on the UK and EU, slowing growth in China, terrorism, etc. Whatever the state of the investment environment today, investors need to be disciplined to maintain a balanced perspective regarding the news and stick to their long-term strategic program designed to achieve their objectives.
Fixed income securities have traditionally been part of the diversification in investment portfolios to provide income and some insulation against the inherent volatility of equity prices, but they may no longer be as safe as in earlier days. During the extended bull market over the last eight years since 2009 both stock and bond prices increased to new all-time highs. Even with yields and spreads at historic lows, the demand for bonds continues to be strong, especially from investors in other countries where rates are even lower. These conditions will likely lead to lower returns over the next few years.
Equity investments in operating companies provide investors with the opportunity to be partners with managements to receive attractive returns on investment over time if the companies do well, providing, of course, that the investor does not pay an excessive price for the investment. Short term volatility in prices is mostly driven by emotions and makes some nervous, but stock prices over time tend to move around intrinsic value based on a company’s expected earnings and book value; that’s the nature of publically traded stocks. As stockholders we are buying into the future earning power of companies and it’s essential to take the long view.
At Whitnell we believe that the entrepreneurial spirit is still alive, not only in America, but throughout the world. Over time, a well-selected portfolio of equities of different businesses at home and abroad should deliver profitable results. Thank you for selecting Whitnell to be your investing partner.
Note: We have gathered the information contained in this report from sources we believe reliable; however, we do not guarantee the accuracy or completeness of such information. You should not assume that any discussion or information contained in this market commentary serves as the receipt of or as a substitute for personalized investment advice from Whitnell & Co. No part of this publication may be reproduced in any form, or referred to in any other publication, without express written permission.