Investment Commentary

photoApril 20, 2017

Return of the Dreaded Deadlock?

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.

Invest­ment Implications

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.

Robert has been a leader in socially respon­si­ble invest­ing since his pio­neer­ing work in SRI forty six years ago. He is cur­rently Chair­man of Zevin Asset Man­age­ment and has held var­i­ous senior posi­tions at the for­mer United States Trust Com­pany of Boston. In the 1960s Robert was also a pio­neer in the use of Mod­ern Port­fo­lio The­ory and com­puter tech­nol­ogy applied to invest­ment deci­sion making.