We usually write our annual investment preview right after New Year's Day, sometimes sneaking in a few extra days to try to gain some additional clarity on the year to come. This year, however, we waited until a new political era dawned, for good or ill, with the inauguration of President Trump ten days ago. Readers undoubtedly will have a range of opinions on the new president, but all can agree that the economic and thus investment implications are profound and far-reaching. There are cross-currents everywhere you look. People march in the streets, yet stock markets the world over are at or near record highs. Many are despondent over the state of US politics, yet consumer confidence is as high as it has been in years. The country is bitterly divided politically, yet capital and consumers seem overwhelmingly optimistic. Can one be depressed politically but exuberant economically?
The above question is not so easy to answer. The pages of Twitter and Facebook are full of anger and sadness vowing resistance to the new Administration, not least over the latest battles over immigration. Yet I would bet many of these same people are working at businesses doing better than in a long while, with 401(K) holdings and home values markedly higher. This isn't the work of a week in office but of an economy that seems to have gained traction as 2016 wore on after a depressing start. The election sweep of Republicans in Washington may also have contributed to the feeling that something, anything, will finally be done to contribute to the economy, whether it is infrastructure spending, tax reform, or right-sizing the regulatory burden.
Companies reporting 4th Quarter earnings this month have, for the most part, shown real growth in earnings and sales. Obviously these results came before the Inauguration and only two-thirds after the election. But the pattern in many important industries is clear. Boeing (BA) sold a lot of planes. Netflix (NFLX) added many subscribers. Skyworks (SWK) sold an incredible amount of semi-conductors, to name three of Arrival Capital's favorite large cap investments. The election may have crystallized a belief of business and investors that an improving underlying economy will now be the beneficiary of a government-inspired tail wind that will carry successful businesses to even greater levels of profitability and investors to greater profits. These benefits, if they materialize, will of course even accrue to investors who do not share the Administration's goals, or support the means to the ends.
There are, of course, reasons to remain cautious. The amount of rancor and divisiveness in the air is harmful not only to the national mood but also undercuts the chances of bi-partisan support for economic change for the better, whether infrastructure spending, lower taxes or reduced regulations. The new Administration's impulses on curbing trade and managing international affairs with China and other rivals may inhibit the growth of a more vibrant and productive economy the world over. After a crazy weekend of airport detentions and marches, weeping senators, hysterical commentators and cautions Republican lawmakers, the market is down more than 1% late-morning. Politics continue to matter, as does competence in managing policy changes. Remarkably, the President's tweets still matter to individual companies, witness the move in Lockheed Martin (LMT) today.
Strategically, Arrival Capital has adhered to an approach of value investing in companies that are not only cheap statistically but also in the political sweet spot in that they are in the energy, materials and/or industrials segments that could stand to benefit most in a sustained economic upswing. In keeping with our value investing philosophy, however, we also look for good, cheap entry points in tech stocks and healthcare businesses, that have largely trailed the recent market surge. Of course, there are always the un-correlated opportunities in stocks that have fallen or lagged for non-political reasons that we view as temporary overreactions, as with media stocks last year, and lately have included REITs, restaurants, retail and clothing manufacturers.
We have found that creating a diversified portfolio of undervalued stocks has actually gotten a little easier of late because the economic and political cross winds have created so many different investing opportunities as uncertainty temporarily sweeps through one industry and then another. Our job then becomes knowing the baseline expectations of individual companies, seeing how temporary concerns affect valuation, and, finally, considering whether risks to a company's prospects are being correctly or overly discounted by the market price.
Investors are people, too. We understand if some of you might be too angry to unemotionally analyse potential economic outcomes, or, possibly, too giddy in your expectations. We would only remind investors that the best thing you can do for your own financial security is to try to build wealth through reason and a careful weighing of potential risk vs. reward. With enhanced wealth, you are freer to support not only your family and loved ones but also the causes that are dearest to you. At Arrival Capital, we are here to support investors, families, and individuals with the best, most dispassionate advice possible and make the future a more secure one for us all.
To our clients, thank you for your continued trust and confidence in these turbulent times; and to others concerned about their own financial prospects, please consider giving us a call today.
