November 7, 2018
Last night the US had their mid-term elections and the results were . . . meh. Largely as expected, the Democrats retook the House and the Republicans kept control of the Senate (the votes are still being tallied as this is being written).
There is a lot to be written on this and the airwaves and internet are alight with opinions and ideas about what happened and so forth, but the end result is that democracy largely worked as expected. The turnout appears to be larger than normal, and the GOP didn’t get ripped out of their seats. Now there will be many stories of abuses of the process like that in Georgia, but there was no real groundswell at the senate level to take control out of Donald Trump’s hands.
What does this mean for investing? The early indication is that markets are going to rise, but I think that traders are simply reacting to ‘no bad news’ on the home front. But in reality the concerns that existed before are still relevant now.
- Donald Trump’s America is improving job opportunities by making it hard for immigrants, legal and illegal to come to the country. That may have long term consequences on innovation, consumption, population growth and so forth, but in the near term it makes the employment picture better. Pressure on companies to repatriate jobs, cash and look inward are also significant factors in a near term rise in economic activity. Finally, the tax cuts mean that companies are returning more cash to shareholders, have more money to spend on employment and so forth. The downside is that all of this is being done with very large deficits for these good times, rising interest rates (and repatriated capital) leading to a strong dollar making US goods more expensive and meaningful uncertainty about the US as a partner, both politically (including militarily) and economically. At some point these uncertainties may rattle investors who have bid up assets based on a risk profile that assumes the world will continue for a LONG time as a happy go lucky place to invest.
- Europe’s woes have not disappeared. During the run-up to the US election a number of significant things happened in Europe, they include Angela Merkel’s party suffering losses to far right opponents and her acknowledging that she will not seek further political appointment, Italy’s budget was rejected by the EU, and Brexit uncertainty continues to rage.
- Without a serious rebuke to the GOP, relations with China are not likely to improve, and President Xi Jinping has, just this week, rejected protectionism (which is Trump’s main focus). While the trade war may play out in many ways, this is an ideological divide between the US and China, but also much of the rest of the world.
Beyond these things we have debt problems, rising interest rates, uncertainty in the Middle East, migrants, weather problems and elections in Germany, Italy, the US, and many other places suggest that uncertainty is more likely than consistency . . . yet the markets are pricing in a consistent and rosy future for companies.
There is a good chance that the market consolidates in this range while some of the uncertainty is removed or clarified, but the market has now broken down through a major up-trend and the bottom of that channel is likely to become resistance. As stated a few weeks ago, this bottoming is a process, and while a short term bottom may be in, it is difficult to imagine the economics improving for companies from this point, so returns are likely to be muted until a true downturn occurs.
The difficulty is knowing what fair value is when there is clarity on some of the many issues facing the world. As they are dealt with in politics, business and social activity, the results become clearer and then future prices are easier to predict. Currently the only thing really, really clear is that the way the world has been progressing for the past 30 years is breaking down and the outcome is uncertain.
Keeping a significant amount of cash means that you can wait for true value opportunities and there is highly likely to be many in the coming two years. Remember moves down are usually very swift, while recoveries take a long, long time.