These past few weeks have been particularly eventful, from politics to economics, to the world of sports. While some events are more impactful than others, there are reminders and a few warnings lurking within each story.
On the front page – Brexit… The United Kingdom voted to leave the European Union, a move now known as Brexit. This is likely to have a negative impact on global growth through the end of this year, and possibly for much of next year, which is not exactly good news given the economic struggles in most of the developed world. A key question is whether other countries will also pull out? We have long believed that the EU was ultimately doomed, and this event may be the start of that unraveling.
As the U.S. $ rallies against the other currencies, the pressure on the Fed to maintain low interest rates intensifies. This will prolong the “search for yield” that has driven the out performance of higher-dividend stocks.
From a political perspective, and perhaps far reaching, Brexit is an indication of the epic battle we have frequently discussed in our newsletters – Main Street’s growing disgust with political elitists and bureaucrats who pander to the wealthy, while the middle class continues to struggle. Much of Europe long ago chose the path of socialism, building entitlements and mountains of debt, which strangles future growth potential. The British people have essentially rejected this path. Will the same occur in the U.S.? The election in November will largely answer that question.
Meanwhile, interest rates are likely to remain low for the remainder of this year and perhaps for a few more years. This will not help financial stocks, or retirees counting on investment income from bonds and CDs, but will continue to support stocks that pay above average dividends.
In this context, we are searching for bargains across all of our portfolios, but are being very patient and disciplined when it comes to security selection. We realize that as the search for yield continues, valuations in this sector will become even more stretched, which raises the risk level of owning higher-yielding stocks. From an overall market perspective, the fact that U.S. stocks largely recouped the dramatic drop following the Brexit announcement is a positive sign of a global flight to quality, which should support U.S. stock and bond markets, at least in the short run.
Long-term fundamentals ultimately matter… It is certainly possible that U.S. stock and bond markets will continue to benefit from the turmoil within the EU. Moreover, there is also a chance that there will be an “election rally” late in the 4th quarter. But, longer term, stock prices will have to be supported by economic growth and higher corporate earnings. While forces, like Brexit, a global flight to quality, and abnormally low interest rates, can force asset prices higher in the short run, unless underlying fundamentals eventually improve, the resulting “valuation bubble” will ultimately burst. Admittedly, it is very hard to predict how much and how long the bubble will inflate, and just as hard to predict the timing of its eventual bursting. Rest assured these are discussions our investment team is having routinely as we structure portfolios from a risk-management perspective.
Politics. There is no escaping it… We have about four months to go before the presidential election. I, like a lot of people I talk to, can’t wait for it to be over. One side seems to be celebrating the fact that their candidate hasn’t been indicted, while the other side cringes every time their candidate opens his mouth. I just can’t stop wondering how we got here…
And perhaps more importantly, how do we get to where we think we should be? Our country hasn’t faced a more desperate need for positive and effective leadership since World War II.
We need someone like… The world lost one of the greatest coaches in the history of the game of basketball when Pat Summit passed away from Alzheimer’s at age 64. Summit led the Tennessee Lady Vols to 18 final fours, winning 8 national championships and an all-time record 1,052 games over her 38-year career. She will long be remembered for her unsurpassed work ethic, commitment to excellence, and for her charismatic leadership on and off the court. She gets my vote for president of the United States.