I read an interesting comment recently, by a well-respected economist, in which he basically said that it wasn’t his job to offer political opinions on the upcoming presidential election. I’ve heard the same thing from leading investment strategists as well. Increasingly, politics is becoming a subject more and more people just don’t want to talk about. Each side is entrenched in their viewpoint, fully convinced their opinions are correct, and even more convinced the other side is completely wrong. So, neither side has what I’ll call - a relentless pursuit of the truth. What does that mean? Truth, particularly as it relates to politics, can never be identified without thorough and objective analysis of all relevant information and viewpoints. This is simply not being done today, by either side. I’m not sure it is even possible today.
Why does this matter?... Maybe, in fact, it really doesn’t. Maybe it doesn’t matter who leads our country. Perhaps our country and economy are so resilient and adaptable that it doesn’t matter who resides in the White House. Maybe it doesn’t even matter who the leaders are in Congress, or even who sits on the Supreme Court. If that is true, then a relentless pursuit of the truth is admittedly a waste of time.
But what if it does matter?... What if questions like the following really do matter?
- What are reasonable entitlements and social safety nets that our government should provide that won’t burden future generations with unpayable debt?
- How can we make capitalism work for more people without suffocating its future growth potential with over-regulation?
- How can we simplify our tax code, spurring economic growth, while funding necessary governmental services?
Foundational questions like these, and there are many more, are complicated and controversial. Moreover, they are not new, yet we don’t seem to be able to find and implement effective solutions. Instead, we yell back and forth, blame the other side, and nothing gets resolved. Are we permanently stuck in this state of dysfunction? I surely hope not.
If foundational questions matter, then a relentless pursuit of the truth is not only necessary, it will largely determine the future of our country. I know the obvious question - who gets to define truth? That question, in my opinion, is part of the problem. As one of my partners pointed out when he read an early draft of this newsletter, truth, by definition, is not subjective. It does not depend on opinion, plays no favorites, and isn’t swayed by feelings.
Still, a relentless pursuit of the truth, by both sides, by all of us, will result in a compromise we can all agree on, at least covering the really important core values. Is this an unrealistic expectation? Perhaps, but despite our current state of polarization, I remain hopeful that at some point we can find common ground. Eventually, don’t we have to?
How does this process work?... The first step is to list every possible viewpoint on a particular topic then fully investigate the pros and cons of each viewpoint. In other words, rationalization, justification, political spin, sound bites, and unsubstantiated opinions have to be removed from the process. Each side must objectively assess every possible viewpoint; in essence, each side must build a thorough case for the other side of the debate. WE NEVER DO THIS. And that is the problem, or that is why truth is so elusive in our country today. It’s why we don’t really trust our politicians, perhaps why we don’t trust each other.
Every time I think about all this, one question keeps gnawing at me – is the solution to this problem top-down or bottom up? In other words, am I just waiting for a charismatic leader who can bring us all together to start the conversation and drive this relentless pursuit of the truth? Or will the solution emerge from a grass-roots effort? Perhaps, one community at a time?
Thankfully, earnings reports have taken center stage as it relates to the overall stock market. Unfortunately, earnings in the 2nd quarter have been a mixed bag. While the majority of companies have beaten expectations, most have tempered guidance for the remainder of the year. The overriding mood in corporate America remains cautious, with few signs that the economy is going to break out of its tiresome slow-growth environment. The positive aspect of this is that interest rates are likely to remain low through the end of the year, possibly well into next year. And it has been low interest rates, more so than strong economic growth, which has fueled the recent advance in stock prices. Essentially, as the market grinds higher, driven by record low interest rates, a “valuation bubble” is being built. Either the economy and earnings will accelerate or the bubble will eventually burst. In the meantime, as history has shown, valuation bubbles usually expand far larger and far longer than most investors anticipate.
In practical terms, portfolio decisions and stock selection must reflect this valuation bubble environment. This means being relatively cautious, but also doing very deep analysis on individual company fundamentals, in search of true growth stories. Companies that can consistently outpace its peers by new product innovation, by operating more efficiently, or through value-added business transactions, will likely outperform. These are the types of companies we are searching for within our different investment portfolios.
And we are relentless in this pursuit.
Michael Kayes, CFA