Summer Client Investment Letter {Part II}

We are publishing in a serialized format this week our most recent investment letter.  The letter was written between the 10th and 15th of July.   Below is part II. 

What is your expectation for our markets?

The June 30, 2016 price of the S&P 500 was roughly 1% higher than where it traded in November, 2014.  That’s 21 months where stocks basically went nowhere.  It isn’t unusual for stocks to mark time digesting gains.  The last such period was from mid-2011 to early 2013 before stocks moved substantially higher from that previous base.  What’s kept a lid on gains during this time has been the above-mentioned higher earnings multiples.  Also, sluggish US economic growth has led to stagnant corporate earnings.  Investors will likely begin focusing on our elections and upcoming meetings by the Federal Reserve in July and September. Meanwhile the market could encounter its traditional summer doldrums.  This could lead to a build-up of negativity amongst investors likely spurred on by the business media.  I say not so fast.  I’ll point out again that economic growth is still growth while unemployment is at record lows.  Consumer confidence is high even as those consumers spend money in nontraditional ways.  Car sales remain near record levels and just as importantly interest rates are low and likely to remain that way.  These are not the circumstances that historically have led to bear markets.  Most important perhaps is that corporate estimates for 2017 are now rising.  As such we could potentially see upside earnings surprises in the coming months.  Stocks may have sensed some of this potential improvement in earnings, hence the market rally we’ve seen these past several weeks led by more growth-oriented indices and sectors.

What comes out of the US elections in November?

Probability suggests that the market is currently pricing in a Clinton Administration.  It also suggests if investors begin to doubt this consensus then markets could become volatile, as investors hate uncertainty.  Mr. Trump is well known to the business world, but a President Trump seems to be a blank void.  We know little about his future economic policies and what he has said so far has been vague and often contradictory.  Whatever one may think of Mrs. Clinton, she has a long history in government.  The business community already has a basic understanding of what a likely Clinton Administration would do in terms of economic policy.  There will be no indictment stemming from the investigation into Mrs. Clinton’s use of a private server while Secretary of State.  However, there are still a few ways investor consensus on a Clinton presidency could change. The most likely would be if something would happen to her health.  She is I believe 71.  Another would be if she performs so poorly against Mr. Trump in the fall debates that it leads undecided voters to reassess her opponent. Short of this I would say the odds favor Mrs. Clinton as President with a divided Republican Congress as the most likely outcome.

We will publish part III of this series tomorrow.

*We owned ETFs related to the S&P 500 in client and personal accounts at the time this article was written.  Please note these positions can change at any time without notice.