Every so often, individuals and sometimes countries, are faced with decisions that reveal if not define their core beliefs. Perhaps today is one such moment…
In that context here are two quotes worth pondering:
- “We find joy in those fleeting moments between ratios; the crescendo of rpm, the gentle click of the gate, the building inertia in our chest as the drivetrain becomes whole again,”
—an excerpt from Alan Macey in the Wall Street Journal November 9, 2015 in a manifesto that helped give birth to The Manual Gearbox Preservation Society. - “The terrorist threat to freedom is worldwide. It can never be met by appeasement. Give in to the terrorist and you breed more terrorism. At home and abroad our message is the same. We will not bargain, nor compromise, nor bend the knee to terrorists.”
—Margaret Thatcher
In a strange way these two quotes say the same thing. Freedom matters. It matters a lot.
The importance of Mr. Macey’s Manual Gearbox Preservation Society, which the gear-shift enthusiast started in response to the fact that the percentage of cars sold with manual transmission has fallen to only 7%, should not be dismissed lightly. It says something about a country where individuals can freely and passionately pursue all kinds of interests, even ones that seem trivial to others. America is such a country, and it is part of our natural fabric, as well as our enduring strength. Freedom of expression, of thought, and of speech, are all integral components of our unalienable right to pursue happiness. It is, to no small degree, what distinguishes us from the totalitarian, repressive regimes that dominate much of the rest of the world.
Still, I can’t help but chuckle at this story. Sometimes, we take our interests and ourselves too seriously. In contrast, I can’t find anything humorous about the second quote, delivered by Margaret Thatcher after surviving an assassination attempt.
As recent events have shown, freedom is under attack, and many fear it is going to get worse. I’m not sure how exactly, or over what time frame, but I tend to agree. This fear of what could happen can be stifling from many perspectives. First, businesses will continue to be risk-adverse, while holding inordinate amounts of cash instead of reinvesting it. Individuals will also tend to hunker down, thereby saving more and spending less, at least on the margin.
The result is below average economic growth, which has stubbornly persisted over the past few years. My sense is this slow-growth environment is likely to persist through 2016.
From an investment perspective this isn’t all doom and gloom. In any situation or environment there are always opportunities, and the present is no exception. The United States may have shrunk from the world stage politically, but it has not economically. We still have the largest, most diverse, economy in the world. Beyond that the U.S. is virtually energy independent, has ample supplies of fresh water via its vast lakes and rivers, unlike much of the world. Moreover, the U.S. has demographic advantages over its most formidable economic competitor, China. Beyond that we have respect for the rule of law, world-leading universities, and many of the globe’s most innovative companies. Based on this alone, it should not be surprising that the U.S. dollar has been very strong, while the equity market has been resilient. What’s not to like?
Can this growing terrorist threat upset our way of life? Isn’t that the critical question we face today? How are we going to deal with it? And who will lead that effort?
How we answer these questions will impact the various sectors of the economy and stock market very differently. After the recent attacks in Paris, the Defense sector rallied sharply. So did Energy and Consumer Staples. This action, across three diverse sectors seems logical, at least in the short term. First, Defense stocks rallied for obvious reasons. Any escalation in conflict or an increase in military spending will push the Defense stocks higher. Second, Energy stocks have historically rallied following a spike in geopolitical anxiety, especially when it involves the Mid-East. Today, what geopolitical conflict doesn’t? Third, Consumer Staples usually rally when investors are worried about the future. In a nutshell, despite very uncertain times, the stock market is acting rationally, at least for the moment.
As we approach the end of the year, we remain cautious. The business sector faces formidable headwinds, making stock price gains difficult to come by. First, the Fed is likely to raise interest rates at least once. Second, businesses as well as individuals face rising health care costs and continued government over-regulation. As a result, we do not expect the economy will improve in 2016.
The most successful companies in this slow-growth environment will have to drive earnings gains through new product innovation, relentless cost cutting, and by making strategic acquisitions and divestitures. Those are the key success factors we will continue to search for as we build equity portfolios.
