Jack Welch, the former chairman and CEO of General Electric wrote an interesting editorial in the Thursday, October 30th edition of The Wall Street Journal. I’m hard pressed to think of a more interesting business leader to debate as the focus of my first edition of Willingdon Views.
In Mr. Welch’s article, The ‘But’ Economy, he challenges the business media for adding the qualifier – but, to generally positive third quarter earnings reports. “Sales were up – but analysts warned that cost cutting explained most of the gains. Earnings were up – but the mood of optimism was tempered by concerns about global competitiveness.” Mr. Welch cites two primary causes for this “grumpiness” as he describes it. First, he blames the lingering skepticism from the 2000-2003 bear market. Maybe it is “safer” for investors to be skeptical of an earnings recovery after being burned when the stock market bubble burst. The second reason is political, he contends. It does make sense that Democrats might prefer a struggling economy to a full blown recovery as the 2004 election year approaches. Both of his points are well taken, but there is one important point he failed to address.
Investors and the business media will continue to dwell on the past until a new story emerges that is worth their attention. Since the Internet bubble burst in 2000-2001, the market has floundered with out a leadership theme. Today the investment community is starved for a dominant theme to follow, a story they can understand and follow. The build-out related to the explosive growth of the Internet was the dominant theme that drove the market for the better part of the 1990s. In the absence of this type of leadership, the market will continually magnify the importance of economic or geopolitical issues to see if one can develop into a sustainable leadership theme. The war against terrorism, corporate governance and reform, global competition, deflation, trade with China, the 2004 presidential election, and the quality and sustainability of third quarter earnings are all “mini-themes” that have impacted the market recently. While each of these can increase market volatility in the short run, I don’t believe any of these issues will drive the market on a sustained basis.
The most important investment issue, in my opinion, is not to question the relative importance or sustainability of these mini-themes, but instead to focus on two critical areas. First, huge potential rewards can be earned by investors who anticipate, or at least identify early, the next leadership theme. The same skeptics Mr. Welch talks about may contend that we won’t ever see another dominant growth driver like the Internet. My bet is they will be proven wrong. It is only a matter of time. We have the most innovative, entrepreneurial society in the world and eventually new discoveries will lead to another impressive growth phase. New businesses and even entire industries will emerge over time that don’t exist today.
In the meantime, stock selection becomes even more critical in a market environment without sustainable leadership. Achieving above average investment returns will depend on picking winners across different industries and economic sectors, while being ever watchful for the next wave.
In future editions of the Willingdon Views I will offer more discussion on potential leadership themes that may eventually emerge to drive the next growth phase.
A personal note…
After spending the last eight years as the Chief Investment Officer at Eastover Capital Management, I have recently decided to start a new investment management firm, which will be called - Willingdon Wealth Management. I am very excited about this opportunity and look forward to sharing more about it with you in the near future. In the meantime, please let me know if there is anything I can do. Thank you for your time and continued support.
