Virtually every day some event goes viral. Through Twitter or YouTube, or some other cyber highway, earthshattering events are spread across the world in a nanosecond. For those that make their living, or who are simply addicted to the Internet, producing something that goes viral is the Holy Grail. What’s upsetting in all this is that too often our first reaction to something strange happening isn’t to intervene, or offer a helping hand, it is to capture the moment on some mobile device and send it out to the world. We’ve lost our interconnectedness; we are instead curious observers. The problem with this dynamic is that problems are never solved by observing them. At some point, somebody has to do something, and what an individual actually does is significantly more important than what an individual captures on video.
Watch what President Trump does... Donald Trump has over 20 million followers on Twitter. In a sense, Trump goes viral every time he tweets. This gives him the advantage of communicating his message broadly, unfiltered, and on his terms. The media and his opponents despise this. Moreover, their focus continues to be searching his every tweet, comment, or decision, in hopes that they can pounce on a misstep and launch the next viral story. This focus, or perhaps obsession, is likely to persist throughout Trump’s term as president, and it will have an overwhelmingly positive impact on the stock market. Let me explain.
As a result of his abrasive personality, the expectations for Trump are likely to remain relatively low throughout his term. Stoked by the mainstream media, confidence in Trump won’t fully reflect his accomplishments or even the progress made by his political team under his leadership. The worst fears of his opponents will never be far from the daily talking points of the media. It will be this relentless skepticism and political attack that will serve as the proverbial “wall of worry” that will drive the stock market higher over time. To a large extent, this is what has happened since the election. Historically, the best time to buy is when expectations are low, and as long as criticism of Trump remains heightened, expectations will remain low, providing fuel for positive surprises.
Trump has targeted several areas to work on including: jobs, overall economic growth, global trade, tax reform, easing the regulatory burden on businesses, and promoting a stronger, more involved presence for our country around the world. How much can he actually accomplish remains to be seen, but ultimately, our economy and stock market will be driven by what the new administration and Congress achieves in these important areas.
Earnings growth is the key... Meanwhile, several of the largest banks reported earnings for the first quarter, starting what will undoubtedly be a critical earnings season. Overall the results have been fairly solid as JP Morgan, Citigroup, and Wells Fargo all exceeded analysts’ earnings estimates in the first quarter. As we have stated in previous editions, with the overall market selling at a Price Earnings ratio of 18x, earnings growth remains an essential prerequisite to a continued advance in stock prices.
Another key driver is gaining momentum... Recently, activist investors have targeted General Motors and there are rumors about PepsiCo being a potential target of a Brazilian Private Equity Fund. Both are indicators that Merger & Acquisition activity will continue to be an important driver behind a continued advance in stock prices. With market caps of $50 billion for GM and over $160 billion for PepsiCo, M&A has the potential to impact even the largest companies. Typically, all it takes is one mega-deal announcement to spark a feeding frenzy in an industry or sector, as corporations intensify their search for strategic partnerships.
One last viral event... I recently read the book “Make Your Bed,” which was inspired by the University of Texas commencement address delivered by Admiral William H. McRaven (U.S. Navy Retired). His amazing speech went viral and his book is on back order at Amazon. His simple but powerful message is about doing something. Start with something small each day, like making your bed, then building on that to accomplish greater things. I wonder how many members of Congress actually make their bed each morning. There is so much for them to do, as there is for each of us.
Michael Kayes, CFA