Here Comes Willis...
Watching the political process over the past few weeks has certainly been entertaining. Each day seemingly brings a new question, or challenge, related to our collective future as a nation. Yet, one question never seems to be too far from my mind. If our country remains largely divided, what great things can we hope to accomplish?
When I ponder this defining question, I am reminded of my all-time favorite basketball team, the 1969-70 NY Knicks, which won the NBA championship in seven games over the Los Angeles Lakers. That Knick team had remarkable team chemistry. As one of their star players, former U.S. Senator Bill Bradley put it, "We liked to make the pass that led to the pass that led to the basket." The team would routinely refrain from taking a good shot, in search of an even better shot. The key to their success was that every player subordinated their individual self-interests to the overall goals of the team. Championships are rarely won any other way.
With this backdrop, it makes me wonder what a championship would look like for the United States this year...
Goal #1 - Shrink the power and control of the federal government. As I have long contended, our country can grow the size and scope of the federal government or it can grow the overall economy, but it cannot grow both at the same time. The last decade has largely proved that point and the longer-term track record makes achieving this goal quite a stretch. In 1950, the total number of pages of federal regulations numbered around 10,000. Today, that number is over 180,000. The Trump administration has promised that for every new regulation passed two will be repealed. I’ll believe it when I see it. Still, there is hope that the new administration will be more business-friendly. Compared to the previous administration, which had only 5 years of business experience combined, the new administration, including cabinet nominees, has over 150 years of combined business experience. At this early stage, I am making no comment about the effectiveness of Trump’s team, but their vast business experience does make me hopeful.
Goal #2 - The United States returns to world leadership promoting peace, prosperity, and economic growth throughout the world. The arena of international relations and world trade is the biggest risk facing the markets in 2017. As the new administration contemplates pulling out of the Trans Pacific Partnership and renegotiating the North American Free Trade Agreement (NAFTA), the risk to the global economy looms large. Moreover, labeling China a “currency manipulator” could lead to high tariffs and a trade war, resulting in harmful economic impacts around the world. From this perspective, this goal may also be difficult to achieve.
Goal #3 - Our country discovers a unifying common purpose and a willingness to sacrifice self-interests to achieve larger goals. On the day of Trump's inauguration there were protests all over the country. One side reveled in celebration while the other expressed their concerns on numerous social and political issues. Are we even looking for a unifying common purpose? Trump supporters want less government and more control over their own destiny. His detractors want lots of things as far as I can tell. Some worthwhile, some a bit puzzling to me. But what do we all want that will benefit the common good? I don’t have that answer, but we should all search for it until we find it. Until then, we remain largely divided; perhaps more so than at any time in our history since the Civil War. Within this context, my final goal may be unachievable, at least for the foreseeable future.
My sense is that 2017 will be a challenging year in many respects. The Price/Earnings (PE) ratio of the overall market is approximately 17x. Stocks are not statistically cheap and will need progress from Washington, in terms of lower taxes and less regulation, to move appreciably higher. Earnings growth should be reasonable this year, but probably not enough in itself to move the market a lot higher. Like it or not, (I certainly don’t) the market will continue to be driven by developments in Washington, D.C.
Game Seven... At the start of that historic game seven between the Knicks and the Lakers, players on both teams, and the entire Madison Square Garden crowd, searched for one person, Knick center Willis Reed. No one was sure if the star player would play, after missing game six due to injury. Just before tip-off, the announcer, Marv Albert, shouted these words, “HERE COMES WILLIS!” Out from the locker room Willis came, limping his way onto the court. Unfit really, to play, Willis showed up to inspire his team to victory. The emotional lift was all his teammates needed and they went on to win decisively. Reed’s career was cut short because he played in that historic game when he was really too injured to play. I was 11 at the time, but I’ve been inspired by his sacrifice and courage ever since. Oh for a moment like that again today...
Michael Kayes, CFA