Tis the Season to be Hopeful

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I doubt very much that 2015 has been the year everyone hoped for twelve months ago. The markets have been basically flat, the economy has barely grown, the world has become increasingly dangerous, and every serious issue has been politicized and polarized. Despite all this, I have a hunch that 2016 is going to be an extraordinary year. For that prediction to be fulfilled, a few things have to happen.

First, I am hopeful that our nation will rediscover the spirit and values that built the greatest country in history. I hope that we will once again be proud of this heritage, while embracing the incredible responsibility required of a world leader today. I hope that the world will measure our greatness by how much we give to others.

I hope there will be significant changes in the global economy. The key to this, in my view, is tax reform. U.S. Corporations have nearly 2 Trillion dollars in cash held overseas and the expectation is that a large percentage of this will be brought back and reinvested in the U.S. if tax rates are lowered. Lower corporate taxes and a simplified overall tax code would likely free up a good portion of this cash to be redeployed through higher dividends, increased hiring and capital investment. All this would be very positive for the stock market and overall economy.

I hope that the era of government overreach will end fostering a rebirth in the entrepreneurial spirit, which is the foundation of a thriving economy. The last several years have shown the inherent trade-off between growth in the economy and expansion in legislation, compliance, and government oversight. Both of these cannot thrive at the same time. If economic growth is ignited, I hope that our business leaders will conduct themselves ethically and inspirationally. I hope that the world will measure their greatness by how much they give to others.

I hope for healing and common ground in the political arena. This will certainly require an extraordinary leader. I make no claims that this leader is identifiable today, but America has produced them before and will again. To once again be a respected and admired world leader, our country must again truly become one nation, under God. That may seem an unattainable goal, but we were that country once, and can become that country again. In this context, I hope the world will be overwhelmed by how much we love others, especially those not quite like us.

While we wait to see if these hopes are realized, we will use the following guiding principles to build equity portfolios. First, we will continue to focus on industry-leading companies across the various sectors of the market. We will also search for companies that can grow earnings through product innovation and/or merger and acquisition activity. 2015 is likely to end up as a record year for M&A activity with over $3 trillion worth of transactions, over 30% higher than the amount a year ago. At this point, 2016 is shaping up to be an even busier year. We will also favor companies that can grow earnings faster than their peer group independent of acceleration in the overall economy.

From a sector perspective, Consumer Discretionary, Technology, and Health Care were the best performing sectors in 2015. The laggards included Materials, Utilities, and Energy. I suspect we will see some reversion to the mean in 2016, but sector rallies will be erratic, driven by geopolitical developments. Unless we make progress in the areas discussed previously, 2016 might end up a lot like 2015.

I hope that won’t be the case.

Merry Christmas and God Bless everyone.

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