Never in the past forty years have I experienced a time when the political climate so dominated the investment discourse and my discussions with you, my clients. For those forty years one axiom has held true. The economy matters, not politics. Even politicians mostly know that. This time feels different. It isn’t. Whether the current political climate has you cheering or jeering, it has been
compelling. Our news is saturated with “alternative facts” and over‐reported
incidents of under‐reported news. This cognitive dissonance is distracting to say
the least. The new administration has come with lots of proposals and executive
actions. These are dominating the news cycle with endless reporting, fact‐checking
and analysis. It is easy to get caught up in it all. But what actually is going on in the
economy and the financial markets?
In the immediate aftermath of the election, the financial markets responded with
unanticipated enthusiasm. Or so we thought at the time. The election may have
been a catalyst for the market strengthening but since then the fundamental backing
for that enthusiasm has become apparent. As the last of the third quarter earnings
corporate reports were coming in, it was finally evident that the slowdown in
corporate profits was reversing and we were returning to overall earnings growth.
At the same time the job market was also showing improvement with increases in
jobs created and decreases in layoffs. More significantly there were some signs of
actual wage growth. Couple these fundamental positives with the prospect of lower
taxes, infrastructure spending and less regulation and the markets were off and
running.
That took us until about mid‐January. Since then the markets have been taking a
breather. Our communal consciousness is taken up by the political spectacle. Much
of that is pure distraction; some is deeply divisive. But the market action is driven
by less inflammatory factors. It is the economy that matters.
So where are we now? The fundamental backdrop of low inflation and interest
rates, corporate profit growth, and improving employment conditions is still in
place. But the political wish list that was expected to fuel much stronger economic
growth is coming up against the realities of legislative logistics, competing policy
agendas and fiscal constraints. The markets do seem to be grappling with not only
the negative aspects of the political agenda like trade wars and immigration
constraints but also with sorting out the winners and losers from the various
proposals put forth by the new administration. Often the winners and losers are not
immediately apparent. The devil is in the details and the demons are in the
economics.
As investors it is important to tune out the noise and focus on those aspects of the
actions that will have economic impacts. That sounds easy enough but at this stage
it is quite a challenge. Of the current proposals with the most direct economic
impact, some are positive and some are negative. Almost all require Congressional
action and thus are unlikely to survive in current form. It may take some time
before the noise settles into some pattern and it will be possible to anticipate the
true implications of the inevitable change. Meanwhile we will focus on the long
term fundamentals of the economy and the corporations in which we invest. Oh, and
maybe looking for a good “noise‐cancelling” headset.