By One Vote

My political career ended in 4th grade when I lost the election for class president.  It was the purest of elections, without exit polls, super pacs, or phony campaign promises.  It was a week-long education of why the right to vote is such an important fabric of our culture.  Above all, we learned that we should vote for the candidate who would do the best job for the benefit of the class as a whole.  Not necessarily the candidate we liked the best or who was our friend, but who would be the best leader.  Voting, we were taught, was a selfless act.  So naturally I voted for James Ramsey and lost by one vote.  It just didn’t seem right to vote for myself. 

Currently, the House Oversight Committee, the Attorney General and the Justice Department are all battling about the qualifications for voting, specifically about adding a citizenship question to the 2020 census.  A popular congresswoman from New York made a telling remark about what is at stake regarding this citizen questions when she stated, “This determines who has power in the United States of America.”  Politics in our country is all about power, not about doing what is best for the entire country.  Those in power, economically or in any other way, are loath to give it up, while those longing for power refuse to accept their plight.  I really can’t see how this polarization ends peacefully, nor how the process produces anything that benefits the country.

At this time of year, I love to read commencement speeches.  I’ve never had the opportunity to give one, probably because I lost that election in 4th grade…  If I ever get the chance, here is what I would share –

  1. Don’t expect a level playing field, they don’t exist.
  2. Whatever you choose to do, outwork everyone every day.
  3. Your legacy begins today, build it wisely.
  4. Put God first, and others before yourself, in everything you do.

I remain hopeful that someone in this next generation will be the leader we so desperately need.

In previous editions of Willingdon Views, I’ve written about the different forms of capitalism, namely free-market capitalism and our current form, crony capitalism.  Recently, I learned that there is a third called “surveillance capitalism.”  In a nutshell, as companies track where you go, what you buy, what you read and what websites you visit, they can tailor advertising and “help” you make future buying decisions.  No harm there, right?  Unfortunately, surveillance in the wrong hands can be dangerous.  For example, China is piloting a program whereby people are monitored closely and based on their behavior they are assigned some kind of “social score” which will impact their access to public services and other aspects of the economy.  Do we want to give businesses or the government that much control over our lives? 

The battle to determine the nature and effectiveness of our economic system, be it capitalism in some form or an alternative, is a long way from being decided.  The election in 2020 will likely set us on a particular course, with all kinds of consequences, intended and unintended.  I’ll try to keep in mind the lesson from my 4th grade teacher, that voting is a selfless act.  Which economic system is best for the country as a whole?  In my view, that is the critical question.         

Meanwhile, in June, the stock market has bounced back strongly following the May correction and is currently trading near an all-time high.  Despite this recent strength, investor anxiety remains elevated, driven primarily by three concerns.  First, the outlook for global growth continues to deteriorate.  All eyes will be on the upcoming discussion between President Trump and his Chinese counterpart, President Xi at the G20 meeting later this week.  There is immense pressure on the two leaders to achieve a workable trade agreement.  Whether this negotiation will produce a deal is anybody’s guess, but it would be imprudent to make a major bet on this event.  Second, corporate earnings estimates continue to fall, making valuations increasingly stretched.  Next month, we will be watching earnings announcements closely to update our valuation analysis for the remainder of the year.  Typically, stocks do not do particularly well when earnings estimates decline.  Which brings me to the third concern – interest rates.  The bond market has priced in 1-2 interest rate cuts by the Fed beginning in July.  Extremely low interest rates can support higher stock prices in the short term, but the economy and earnings must accelerate to sustain the current bull market longer term.

Given this uncertain outlook, we remain in a defensive mode across our equity portfolios.  In the meantime, we will be opportunistic and ready to adapt as the environment changes.      

Michael Kayes, CFA