Early in my adulthood, after some very painful lessons in life, I realized that no matter how hard I tried, once someone reaches the age of 21, I was wasting time trying to change their bad habits until they had made the personal decision to change the behavior that was causing their difficulties in the first place. I found that this usually does not happen until that person experiences more pain than they are causing others. The reality is that I should probably use the age of 13 instead of 21!
As I discussed in the April edition of the Crouch Connection (Gridlock is Alive and Well), President Trump continues to lock horns with the establishment and the media in Washington, and very little is getting done as far as legislation is concerned. The “Trump Rally” has faded and the promise of tax reform looks doomed.
Trump’s lack of respect for the alligators in the swamp he was planning to drain continues to fan the flames of the democrats and the media, and the opponents seem to be winning the media war. The supporters who had hoped that his tweeting would cease when he took office (that would include me) have been repeatedly disappointed with his thin skin and impulsive behavior.
This gives us little choice, in my opinion, but to implement my “Over-21 Rule” and move to the view that very few of Trump’s business-friendly campaign promises will ever get done. It won’t be for a lack of effort by his staff, but because he is not going to change any of his unhelpful habits that are causing even his supporters to cringe and back away from his disappointing behavior. That’s the bad news.
BAD NEWS – GOOD NEWS
So, if we are to assume that Donald Trump is Donald Trump, and that gridlock will be the norm in Washington for the foreseeable future, what are we as investors to do? Fortunately, the good news is that politics rarely affects the markets unless there is a change to the tax law that is either very beneficial or very harmful to corporate profits. Several recent reports address the issue of political risk:
Jeff Saut, Raymond James Chief Investment Strategist, in his May 26 “Gleanings” discussion, presents charts of the Nixon and Clinton years showing completely different market directions during and after the Watergate proceedings and the Clinton impeachment efforts. Under Nixon the market declined relentlessly (heading into the ‘73-74 recession) while the record bull markets of 1998-99 hardly missed a beat during the Clinton troubles (except for the quick 1998 correction caused by the Russian debt default and its repercussions). Saut remains very bullish, concluding “we continue to believe the equity markets remain in a secular bull market that has years left to run.”
TD Economics, the forecasting arm of Toronto-Dominion Bank, published a report on May 26 titled “Economic Growth is Still the Trump Card” and concluded:
“Our internal research has shown that for political uncertainty to matter, it must coincide with a change in the economic environment. That is, political uncertainty on its own doesn’t matter. As in any dynamic system, if political turmoil doesn’t induce real change in economic behavior, markets need not react.”
TD uses their proprietary “TD Financial Stress Index” to gauge whether events are turning into significant market stress and they have found that the opposite is actually occurring:
“The index remains well below zero, meaning below-average stress exists in the system despite political flare-ups in recent weeks.”
They conclude that they continue to expect above average economic growth with U.S. growth expect to bounce back above 3% in the second quarter.
Our Raymond James Portfolio Strategy team headed by Michael Gibbs in our Memphis headquarters echoed the same sentiment in their May 25 “Weekly Market Guide”:
“The bulls remain firmly in control. We interpret the market's strength in the face of adverse political headlines as a sign of strength. While fiscal risks remain, we believe the overall improving economic and earnings backdrop will keep a bid under the market, albeit at a contained pace.”
"Never bet against America. America works ... I've said this before, it'll work wonderfully under Hillary Clinton, and I think it'll work fine under Donald Trump,"
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Investment advisory services offered through Raymond James Financial Services Advisors, Inc. Any opinions are those of Dave Crouch and not necessarily those of RJFS or Raymond James.