Praying for Houston

“An investment in knowledge always pays the best interest”
(Benjamin Franklin)

Praying for Houston

As we publish this month’s Commentary, Hurricane / Tropical Storm Harvey continues to pummel Houston and the surrounding areas. The flooding is intense, the damage will be massive, and there will be tremendous human and economic suffering as the rains subside and the waters all-too-slowly recede. We take hope in the fact that Americans are a tough, resilient, and generous people. Please consider offering whatever assistance you can to those in need. Let Freedom Ring…

As summer draws to a close, we witness a slight reversal of the trends of earlier this year. Until the past 3-4 weeks, the stock market continued to rally and volatility was positively soporific, while the economy seemed to be slowing down. The global economy now seems to be expanding, but volatility has (at least mildly) awakened and the stock market has faded. The Q2 revenue and earnings season was very solid and the economy is growing, so what’s going on?

We think four things: (1) August historically is a slow trading season, with low trading volume, so the market can move on relatively minimal activity; (2) there is a general consensus that rates will slowly rise (at some point), thus applying a higher discount rate to future earnings and thereby driving lower valuations; (3) the market increasingly recognizes that valuations generally have stretched well past underlying fundamentals; and (4) the market is beginning to price in the realization that much of President Trump’s perceived “pro-growth” agenda is in danger, or at the very least will not be enacted until much later this year, if not well into next year. We’ve been anticipating #s 3 and 4 for most of this year.

Congress will meet only twelve days in September, and the forced priorities will be to increase the debt ceiling and pass a continuing resolution on the budget – there will be little to no time to make progress on tax reform, infrastructure spending, or health care reform. And that’s assuming there might be even a modicum of accommodation between the President and the two parties, which there may not be. President Trump has, through executive order, “undone” a variety of legal and regulatory executive orders put into place by President Obama, and by and large Trump’s actions have been perceived as pro-growth. But real, long-term progress needs to come legislatively, which means compromise, of which there may not be any. Political opposition and social divisiveness is as high as we can remember, and to be seen as even contemplating cooperation with “the other side” could be deadly in next year’s mid-term election cycle.

Other than an expected short-term spike in oil and gas prices, the long-term effects of Harvey remain unknown. Without minimizing the human suffering and the loss of life and property, we simply note that the long-term overall economic effects of most natural disasters tends to be over-estimated by the markets. It may be intense in the short-term, but it tends to be transitory.

We ended last month’s Commentary as follows: “Enjoy the beach, lake, mountain, or your own backyard. Catch up on your reading and with your family. This coming fall, we are likely to see more than just a change in the weather.” We still believe that to be true, and perhaps it has already started. We continue to believe that Q4 will see an increase in volatility and perhaps a (long overdue) market correction.

With that as a backdrop, looking out over the current economic and investment landscapes, here is what we see.