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Tuesday, 29 November 2016 14:23

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A Season for Poetry

The fall has to be the most inspiring season of the year for poetry. The brilliant colors of the forest canopy, leaves floating in the breeze as they fall effortlessly to the ground and the magnificence of college football every weekend. There is no greater stage for tradition, pageantry, and the chance at immortality. This past weekend was a big one on the gridiron, with arch-rivals battling it out across the country. Any player who could lead his team to victory in the biggest game would have to be, as one coach put it, “a man’s man.” That’s a term to reflect on, perhaps capture in a poem...

 

A man’s man makes the play, whatever it takes to win the day

He’ll stare fear in the eye, and risk it all,

And look to no other to answer the call.

 

A man’s man brings his best, poised for the moment, to prove who is best.

He’ll inspire his teammates, with action and voice,

And lead with resolve in that moment of choice.

 

When victory will be determined, yet again.

A man’s man, from beginning to end.

 

I sure hope we can all look back in a few years and say this applies to Donald Trump. I’m not betting that it will, I’m just hoping...

Since the historic, game-changing election of Donald Trump as the 45th president of the United States, the stock market has rallied sharply, while bonds have plummeted. The logic behind these recent price movements is that Trump will get the economy going, and interest rates will start rising, perhaps significantly.

Meanwhile, strategists are scrambling to predict which sectors of the economy will most benefit from the new administration. Thus far, Financials and Industrials have led the market over the past month, anticipating less regulation and higher economic growth. Interest-sensitive sectors, like Utilities, have lagged since the election.

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Let me be clear on one very important point... Nothing is clear. None of the recent short-term moves, within the stock or bond market, represent sustainable trends. They have all been driven by expectations about what the new administration and the new congress will actually accomplish. It is likely that this tendency to “over discount” successes as well as failures will persist into next year. In other words, there will be times that Trump and his team will look like geniuses and there will be times when they look like complete buffoons. There is no denying the significance of the election results, but not all significant events are investable, and this is one that isn’t. Let me explain.

Fundamental analysis will always be the foundation post for how we build and manage investment portfolios. Dissecting the economic cycle, identifying secular trends, and analyzing individual company fundamentals all drive our portfolio management process across our various investment strategies. Understanding the political ebbs and flows is part of the process, but its emotional nature causes frequent exaggeration of its impact, especially over the short term.

It would seem that half the country is hoping that Trump succeeds, while the other half is hoping that he will fail. When he gets something right, one half will exult, and when he stumbles the other half will do the same. All this back and forth will translate into volatile market moves as well. In a sense, this heightened emotional state, still in place after the election, will impact investor sentiment in the short term. Unfortunately, these gyrations will largely be independent of sound fundamental analysis.

Herein lies the opportunity... Our game plan going forward is to take advantage of this volatile environment by selling stocks that have run too far, too fast, and by searching for undervalued stocks that may have over-corrected. It will take discipline, patience, and thorough fundamental analysis to remove harmful emotional extremes from the decision process, but that will be key to successfully navigating these uncertain times ahead.

One last hope... I’ll close with the hope that our country will find a way to come together over the next four years. That we find common ground to solve significant challenges and rise above our current divisiveness over less important matters. If that happens, there will be epic poems written, whatever the season.

Michael Kayes, CFA

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