White Christmas 1978

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The days leading up to Christmas always brings me back to fond memories of the Christmas blizzard of 1978.  My hometown of Herkimer, N.Y. received about 25 inches of wonderful white fluffy snow in less than 24 hours.  My best friend and I spent the day skiing around town, enjoying holiday cheer with neighbors, helping push cars through the snow, before enjoying eggnog and sausage bread at Aunt Sally’s.  It was a joyful day, one I will never forget.        

In nostalgic moments like this, I’m reminded how important it is to do the best I can to produce joyful memories, especially during the holiday season.  Upon these memories, rest enduring friendships and proper perspective of an uncertain future.  I’m curious to know how everyone does that today, so please share your stories and memories with me when you can.

In a similar vein, looking back and understanding the past, in order to chart the best course for the future, is a big part of portfolio management.  There are all kinds of clues from history, various cycles to analyze, trends to extrapolate, and valuation ranges to digest.  But the future never quite unfolds exactly as it did in the past, there are always new ingredients and novel twists on old concepts or relationships.  Even during the darkest times, innovation is always there lurking in the shadows, waiting for the opportunity to change future events.

As this edition of Willingdon Views goes to print, it seems a certainty that the 9-year bull market that began in 2009 has ended.  The overall stock market is down approximately 7% this year, with global markets down significantly worse.  The outlook for 2019 is less than sanguine for the following three reasons:  First, the Fed continues its quantitative tightening, hiking interest rates for the fourth time this year, and forecasting two more hikes in 2019, despite increasing signs that the global economy is struggling.  Fed tightening, and a flat yield curve, do not bode well for an acceleration in economic growth.  Second, uncertainty regarding global trade persists, particularly between the U.S. and China.  While negotiations may produce the all-important win-win scenario, a negative outcome is just as likely.  From a risk management perspective, it would be imprudent to build an investment strategy based on expectations of a positive outcome to trade negotiations.  Third, once the new Congress is sworn in, get ready for an even greater level of polarization, rancor, and verbal warfare.  President Trump is going to have a difficult year.  Is he up to the task?  Can he reach across the aisle and find compromise and workable solutions to the myriad of challenges our country faces – immigration, deficits, trade, overall government spending, to name only a few?  Admittedly, given these issues, it’s difficult to be optimistic heading into the New Year, except for one important point.

The three challenges previously mentioned are well known, and expectations for positive developments in any of these areas are very low.  I don’t think it is unfair to say that nearly half the country hopes the president fails.  Not surprisingly, there seems to be a general lack of confidence in what the future holds for our country.  One side blames Trump for this mess, while the other side blames the other side, and or the media.  It’s all rather frustrating, but again, none of this is new.  We all know we are polarized, and that the system isn’t working well. 

As the saying goes, the one constant in our world is change.  Things never stay the same.  From an investment standpoint, constant change is a fundamental principle.  In this context, change will happen in 2019.  With low expectations currently so prevalent, the potential for positive surprises should not be dismissed out of hand.  This may not seem like a lot to hang our hat on as we enter the New Year, but it may make all the difference as the year unfolds.

So, with that in mind, here are a few potential positive surprises that could make 2019 better than we might expect.

  1. Trump resigns, and Vice President Pence takes over.  It might not make Washington fire on all cylinders, but I think it would be a positive for the markets and for the country.
  2. The U.S. economy continues to grow, avoiding a recession, while the Fed decides to pause from further rate hikes.  Arguably, this is a delicate balancing act, but again, if the worst fears (of a recession or global trade war) aren’t realized, the market might rally.
  3. A dynamic, charismatic individual, who has an enviable record for leadership and success, combined with a reputation for integrity and sound core values, emerges as a third-party candidate and becomes the front runner for the 2020 presidential election. (maybe someone will nominate Urban Meyer, after his retirement from coaching at Ohio State…)

Despite all the doom and gloom, we look forward to next year and hopefully seeing what positive surprises are in store for us.  In the meantime, prudent diversification, valuation discipline, and a commitment to quality, will continue to drive our investment process and overall portfolio management.   

I don’t expect a white Christmas at our home in Davidson, NC, but there are memories to be made, nonetheless.  And so much to be thankful for and so much for which to be hopeful.

Merry Christmas and Happy New Year to all. 

Michael Kayes, CFA

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