Dow Breaks 20K With Soft Earnings; Lessons From The Start Of The Trump

Predictability brings about security. -Magda Gerber

Imagine you are responsible for picking investments for a billion dollar investment fund where the style is active (meaning you cannot just put funds into an index like the S&P 500). Your clients want better than market performance with lower than average risk (who doesn’t?). The majority of your clients favor growth, so you predominantly look at stocks, stocks, and stocks, all different kinds and sizes of companies. In doing so, you have learned to look for businesses which have great leadership, good governance, and industries which are mandatory for human consumption, think things like blood tests, oil, pharmaceuticals, etc.

Essentially, you look for predictability as it gives one a sense of comfort in the repeatability of the revenue streams as you know the rest of the investment world hates earnings disappointments. You also know the business world is full of ups and downs, especially with the inherent nature of new technologies, emerging companies and unique business models, and of course, the unpredictability of the political and legislative environment. Yes, predictability and stability sounds awfully attractive to those who might participate in the investment world.

Speaking of the rough and tumble climate involving financial matters, the Dow Jones Industrial Average closed above the twenty thousand level for the first time ever this week. It did so in spite of the knowledge that fourth quarter 2016 GDP fell to 1.9% (below the consensus estimate of 2.2%). It marks the eleventh straight year the U.S. economy has failed to grow at three percent. The week was also loaded full of corporate earnings reports, which generally came in light, soft, spotty, inconsistent, or more simply, eh.

It is not as if these figures were from lightweights either: Google (NASDAQ:GOOGL), JNJ (NYSE:JNJ), McDonald’s (NYSE:MCD), Starbucks (NASDAQ:SBUX), Intel (NASDAQ:INTC), Microsoft (NASDAQ:MSFT), Qualcomm (NASDAQ:QCOM), Chevron (NYSE:CVX).

No we are talking sluggers, cleanup hitters, companies you can depend on to hit their numbers. There we are again with this lovely idea, one of predictability and consistency. Unfortunately, in the current climate, it is very difficult to have one hundred percent confidence in any enterprise nailing their projections. I wonder why that might be?

Let’s consider the current occupant of the White House, one Donald J. Trump. Notoriously thin skinned, he is not exactly what I would call the most emotionally stable of individuals, as can be seen with his 4 am. tweets and penchant for shall we say, irritating groups of major ethnic populations. Mr. Trump inherits a government which is bloated, inefficient, and one could strongly argue, decade long dysfunctional.

His predecessor made sure to try and saddle him with a slate full of regulations to protect whatever accomplishments decreed by the stroke of his famous pen, mostly related to protecting the environment (you know, spotted owl and desert tortoise kind of stuff). Of course, what can be done by pen can be undone by ink as well, which was the case this week. As an example, President zero took seven years to shoot down the Keystone pipeline, and Mr. Trump took two days to approve it, along with another needed oil straw.

Clearly, delightful Donald, for all of his provocative rhetoric, is looking to free up the business world from unnecessary laws (75% reduction I believe he proclaimed). Some analysts believe Donald will look at using the Congressional Review Act as a way to strip away all of the pesky proclamations by the big O.

Investors are buying the freedom, as seen by a big two hundred point rally this week. They may be getting ahead of themselves, because another piece of Donald’s plan are the various parts of corporate tax reform and repatriation of cash held overseas. A few difficult subjects are going to be the treatment of carried interest for private equity and venture capital firms, as well as the deductability of interest for corporate transactions and in mortgages.

I should also mention the challenge of herding cats, in this case the pesky Republican Freedom Caucus, which is going to fight anything which could increase our little 20 trillion dollar deficit. It makes big infrastructure plans a bit difficult, eh? So, all in all, not exactly the most settled situation with the most stable leader or personality. Almost forgot, I didn’t bring up the whole issue of border taxes with other countries, like our friends to the north and south. I’ll leave that for another time as I don’t want you to unsettle you. I know you like and prize stability.

Y H & C Investments, Yale Bock, and the family of Yale Bock own positions in securities mentioned in the blog post. Investing in stocks can lead to the complete loss of your capital. As always, on any company mentioned here, past performance is not a guarantee of future returns. Investing involves risk of losses on invested capital. One should research any investment and make sure it is suitable with your objectives, risk tolerance, risk profile liquidity considerations, tax situation, and anything else pertinent to your financial situation. Also, the CFA credential in no way implies investment returns will be superior for any charter holder.