January 2018 Market Commentary

“An Investment in Knowledge Pays the Best Interest”
(Ben Franklin)

A Most Excellent Adventure…

Rufus (played by George Carlin): “Hi, welcome to the future. San Dimas, California, 2688. And I'm telling you, it's great here. The air is clean, the water's clean, even the dirt, it's clean. Bowling averages are way up, mini-golf scores are way down. And we have more excellent water slides than any other planet we communicate with…Don't worry, it'll all make sense. I'm a professional.”

Ted (played by Keanu Reeves): Bill, I think they want us to say something.

Bill (played by Alex Winter): What should I say?

Ted: Make something up.

Bill: Be excellent to each other.

Ted: Party on, dudes!

Bill: Good one, dude.

Bill and Ted’s Excellent Adventure” comes to mind as we consider the current state of the markets. We can almost hear the cries of “Excellent!” and “Most Triumphant!”, along with the accompanying air guitar squeals, as the market closes higher, seemingly every day.

The global economy continues to grow, global manufacturing is solid, corporate earnings are strong, and we already are beginning to see here in the US the potential growth catalyst provided by the year-end tax legislation (bonuses are being paid, hiring is increasing, and capital investments are increasing). We give equal credit to the roll back by Executive Order of a fairly significant list of regulatory and generally anti-business restrictions implemented by the previous administration. American corporate capital is coming off the sidelines.

Donald Trump is a polarizing personality, to say the least. But what he said recently in Davos seems to be true: “America is Open for Business.” After Trump was elected, we wrote in a Monthly Commentary about “Good Donald” and “Bad Donald”. Good Donald and the Republican Congress are helping to unleash the “animal spirits” again in the US economy, and though for many other reasons, the global economy overall is illustrating similar growth trends.

But Bad Donald is never very far away. With respect to the economy, this could manifest itself in overly protectionist trade policies, the confusion and contradictions over his dollar policy, massive potential political conflict over immigration, and potential legal challenges or confrontations with respect to the Robert Mueller investigation as we head into a mid-term election cycle.

We don’t believe any of these issues individually can knock the US growth story off course, but collectively they could affect future growth rates. Trying to predict what will happen with or to Donald Trump is a loser’s game that we try very hard not to play – we simply note that his many detractors, whether for political, ideological, social, or personal reasons consistently seem to under-estimate him.

So, what might knock the global growth story off-course? The list consists of the usual suspects: (1) Central Bank policy mistakes (that is, central bankers raising rates too quickly and choking off the expansion or not raising them quickly enough and allowing inflation to get ahead of them); (2) political and geo-political events (with North Korea remaining at the top of the list, followed by the ongoing political and legal imbroglio in Washington, DC between the Administration, the FBI, the Justice Department, and Congress); and (3) trade or currency wars.

The public markets seem very expensive to us, but an expanding economy and strong corporate earnings growth should support a continued rally, at least for a while. There are signs that inflation is heating up, and we believe interest rates will eventually move up, but neither so quickly that the market cannot absorb them.