April 20, 2017
Robert Brooke Zevin, Chairman, Senior Portfolio Manager
The primary reason we were optimistic about the outlook for stock markets after the U.S. election was that one party had control of both Congress and the White House, thus hopefully eliminating the plague of Washington deadlock which had crippled President Obama’s policies as well as many previous presidents. Now we are confronting Deadlock 2.0; and it could be even worse than the versions we have already seen.
President Trump’s narcissism and combativeness leave him ill-suited to master a process in which other people’s opinions matter. At times these same traits seem to render him incapable of remembering what or whose ideas he is promoting or opposing, like a child so eager to run with the ball and score a touchdown that he charges toward his own team’s goal line. This is the story of the American Health Care Act which was supposed to replace the Affordable Care Act. We continue to think that the deadlock between those who want to maintain or expand coverage and those who want to reduce spending will eventually lead to the discovery that every other major developed country in the world has already arrived at: universal health care. The only stumbling block is they will have to call it something other than single-payer or universal health care. Surely they can manage.
Recent evidence also suggests that this administration and Congress will replace much of the Dodd-Frank regulatory structure with simple, quantitative rules such as ceilings on debt-to-equity ratios and a progressive tax on financial institutions according to their size. These modifications would be improvements on the current Dodd-Frank regulatory structure, which employs obscure and malleable rules easily manipulated by banks and other financial institutions. It is much to be hoped that the Democrats in Congress, who traditionally have favored complex regulations and the increased size of banks, will switch to supporting this improvement. The main fight should be to maintain the strict consumer protections, established by Obama under the Consumer Financial Protection Bureau, which have worked remarkably well.
Frustrated at many other turns, Trump has discovered that, thanks to the evolution of an imperial presidency over the last fifty or sixty years, the President of the United States now has the de facto authority to send troops, Navy SEALS, drones, bombers, cruise missiles, or hydrogen bombs anywhere in the world any time he chooses. This is the POTUS that Trump was made for. After the 59 cruise missiles were launched toward a Syrian airfield, David Bromwich pointed out in a New York Review of Books article that the praise this attack attracted from all sides would inevitably encourage him to do more of the same. And so, one week later, Trump dropped a never-before-used 22,000-pound bomb on a complex of remote tunnels built jointly by the United States and Osama bin Laden (!) near the Afghan-Pakistan border when they were allies seeking to expel the Russians from Afghanistan.
Meanwhile the stock market rally, which actually started long before Election Day (see chart), continues on its merry way with Trump stocks (banks and healthcare expected to benefit from deregulation, fossil fuel companies, and weapons manufacturers) essentially on the sidelines, except for the defense contractors. If there is a common element in the global recovery, it is that continued slow but steady economic growth (plus political forces) have led to rising nominal and real wages as inflation remains subdued. Given the absence of robust private or public investment in a low-growth world (except in Japan) and the impossibility of growth through exports, higher real wages have been the only possible escape from our economic trap. Higher wages have now broken out all over like cherry tree blossoms in April, especially in the U.S. and China, the two largest economies in the world. And the fact that for the first time in ten years almost all countries and regions are growing simultaneously means that most of them will grow faster and longer than they would on their own.
Time flies and the world turns under Trump’s hot air balloon, or so it seems. Sometimes this feels like George Orwell’s 1984 or the rise of Hitler; other times it feels like Around the World in 80 Days. Now Trump’s first 80 days are coming to a close.
While the risks are real and greater than they have been, we believe on balance that the prospects for increased global prosperity are strong and the implications for stocks are positive. In addition, there are an unusually large number of likely events over the next year that would harm only some countries and stock markets to the benefit of others, or with much reduced consequences for others. This provides the option of achieving more effective diversification by owning stock in different regions.
We continue to favor high-quality, strong, stable businesses. And we continue to favor companies that are causing the deflationary disruptions through e-commerce, rather than suffering from it. We have found a number of names to add in this category and will continue to seek high-quality stocks to add to client portfolios.