Willingdon Views

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Tuesday, 27 October 2015 13:38

 fallclassic

The World Series begins this week between the Kansas City Royals and my beloved New York Mets. The Royals are making their second straight appearance in the fall classic while the Mets are back for the first time since 2000. Both teams are represented by a close-knit group of players, and it is that collegial team chemistry which more often than not produces champions. Beyond that, it will be interesting to see who will emerge as the ultimate hero on baseball’s grandest stage...

This past week, Paul Ryan, congressman from Wisconsin, has finally agreed to become the next speaker of the House of Representatives. Ryan relented to intense pressure within his party to step into the void left behind when John Boehner resigned. Interestingly, Ryan made his acceptance contingent on his party agreeing to a couple demands. First, he asked that all the different caucuses within the Republican Party support him. No small demand given how fractured they are. Second, he insisted that he be allowed to spend time with his family on the weekends. I find that last request refreshing, given the state of politics today. Despite the immense challenges facing the new Speaker of the House and all of Congress, Paul Ryan remains committed to his family.

In the Harrison Ford thriller, Patriot Games, Jack Ryan and his family are under attack from a ruthless terrorist seeking revenge for his brother who Ryan killed in the line of duty. In the dramatic final scene, Ryan leads the killers away from his family by driving a power boat at reckless speed, clearly risking his own life in the process.

On the surface, baseball, politics, and the movies might not seem to have much in common. But in the aforementioned stories, there is one common thread. The main characters are all acting selflessly. In essence, success results from someone willing to put the interests of the team before self. It is a theme that is needed in this country, perhaps more today than any time since the outbreak of World War II.

draw out growthThere seems to be a growing debate about the nature of capitalism in our country. Some contend it is the root of all evil, being driven by greed and unethical power brokers who need to be stopped. Others point to the unprecedented wealth that has been created in America since the end of World War II producing the highest standard of living in world history. And of course there are those in the middle, who see the pros and cons, despite being frustrated by the polarization. How would this debate be changed if each side embraced a selfless attitude? Would business leaders strive to control the temptation toward greed and monetary excess? Would those at the bottom of the economic ladder take more responsibility for their own choices and potential? Who can identify common ground and lead us in that direction? We need that type of leader desperately, don’t we?

The stock market had a sharp pull-back in August and September. As we entered October, historically a difficult month for stocks, investor sentiment was very cautious. Corporate earnings were due to be released and expectations were low. As this edition of Willingdon Views goes to print, just less than half of the S&P 500 companies have already reported earnings for the third quarter of the year. Overall, earnings have been rather lousy. Very few companies have shown any revenue growth, using share repurchases and cost cutting to achieve bottom-line numbers.

With this tempered backdrop, it would seem logical to assume that stocks would have continued to decline throughout the month of October. But the market routinely does the opposite of what the logical consensus expects. It is one aspect of the stock market which makes it so difficult to predict. With one week to go, the overall stock market is up approximately 8%, nearly erasing the August – September correction. While we welcome the October rally, we remain cautious, because there is a limit to how far stock prices can climb without an improvement in underlying fundamentals.

At the same time, with the Fed likely on hold for the near term, the chances of a year-end rally have increased. While I don’t see significant upside, given how weak earnings have been, I don’t expect meaningful downside either. We just might be stuck in a narrow trading range for a while. Perhaps until some rather big event occurs in November of next year. That event may be a fall classic for the ages...

- Michael Kayes, CFA

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