Summer Client Letter {Part III}

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 III  

What do you think could happen after the election?

I think there is a higher probability of infrastructure stimulus.  I think this could happen regardless of who becomes President. There seems to be some interest in this by both parties so the next Administration might have the political capital to push this through Congress.  For one thing the country needs it. All you need is to take a look at the roads! Infrastructure spending has traditionally been a large jobs creation program so it would also be popular.  It might even become more politically feasible if it becomes part of some sort of “Grand Bargain” linking such spending with a reform of tax policy and immigration reform.  I believe our next President is the candidate that convinces the middle class that they will produce jobs with a living wage.  A huge infrastructure spend is one way to do that.

With all of the negative news on the news why are you generally bullish on the markets?

I have a optimistic longer-term investment bias because I see positive economic developments.  Some of these I’ve outlined above.  Having said that I think it is possible volatility will increase between now and the election.  A market decline of between 10-15% would not surprise me.  Please note that I have said a decline is possible.  I am not saying it is going to occur.  Nobody knows whether we’ll have a large decline or maybe trade higher because nobody knows what the future will bring.   Those that think they know for sure what's going to happen tomorrow or six months from now are either trying to deceive us or deceiving themselves.  When it comes to the markets there is a debate on whether stocks are expensive or cheap.  There is always that debate.   Nobody knows the answer.  You can outright guess or use probability.  I prefer probability analysis because it allows us to define odds of what might happen as certain events unfold.  We will change our long term investment view when the facts as we understand them change.  Until that happens we will stick with what our indicators are telling us, with the caveat, again, that we think there is a higher probability of increased volatility until the election is decided.

We will publish the conclusion to 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.