This has already been, and will continue to be, a week of significant events which, while not currently roiling markets, have the potential to change the mood and with it the degree of optimism fueling investing in those markets. Just today we had the sometimes tempestuous testimony of AG Jeff Sessions coming close on the heels of the same from (former) FBI Director James Comey, and in the shadow of chatter about terminating the special investigator and a pitched rhetorical battle over “travel bans” between the President and the courts. There is talk that the Senate Republicans are working behind closed doors on a health care reform plan, which is the closest to a sign there is that anything in the legislative realm is going to even be addressed before the Summer recess. A “week of infrastructure” was overshadowed by the drama, and did not yield anything of substance in any event. Treasury Sec. Mnuchin has indicated we will not hit our heads on the debt ceiling until early September, but “…markets don’t want us to wait.” The prospects for any market-moving, or perhaps even supporting, progress in 2017 are receding quickly.
Author: Mark Sloss (Page 9 of 10)
Silver and gold will be stolen away,
Stolen away, stolen away,
Silver and gold will be stolen away,
My fair lady.
Three attacks in three months, twice on the Bridge. Unfortunately this is a refrain all too familiar to the British not just recently but historically. They have demonstrated their resilience socially and economically since the late 1930’s in the face of small- and large-scale terrorist attacks, and there is little to suggest otherwise this weekend. Much has been said and written already and more is yet to come on the sociopolitical implications of this drumbeat of violence, but our role is to examine the capital markets implications.
We expect UK markets to continue with little change based on this tragic incident. Tangentially related, the unfolding fracas in the Gulf will probably be more material to energy and broader markets as Saudi, Bahrain, and UAE spar with Qatar over terrorism and the Muslim Brotherhood. But, looking down the road just a scant few days, we are keeping a close watch on the snap UK election.
As we wrote previously, T. May calling the election may have propped open the door a notch to some moderation around Brexit if her contingent showed poorly on the 8th. However, the shock of yet another terrorist incident could further harden positions on matters of border security, immigration, and public support programs and propel the Conservatives and UKIP toward a more certain path of disengagement. If the isolationist forces in the UK win out and the moderate Eurocentrics hold the line in the French parliamentary elections later in June, our attention will likely be drawn increasingly to a Europe ex-UK as the reasoned place to deploy capital and own risk outside the United States.
It is hard to say whether the markets are considering re-rating the certainty premium we reaped in the six months since the US elections or just slipping into the Summer doldrums.
Immediately prior to the election one of the scenarios we put forward was for markets that would be calmed by the status quo of a Clinton Presidency, but with the risk of being roiled by constant investigations and hearings. Regardless of where we sit politically as observers of market behavior, we can generally agree that a Washington DC consumed by palace intrigue would not contribute positively to market performance, particularly a market waiting for trade, tax, banking, securities and other reforms. Nearly twenty years ago another Clinton was in DC’s crosshairs, and markets fell in anticipation of the unimaginable in the Starr report only to fully recover once the unknown was known and the impeachment proceedings were under way.
Investors seem pleased with the outcome of the French election and appear more willing to pay attention to good economic news across Europe. Emmanuel Macron booked a convincing victory on Sunday, and as he takes early steps to form a government, rivals and other political figures are rallying to his side. Manuel Valls, formerly a Prime Minister with the Socialist Party, declared his party dead and threw in with Macron and the soon-to-be-renamed En Marche la République (Republic on the Move).
We raised our portfolio weight in Europe on April 28th with encouraging results so far, but our enthusiasm is tempered by Marine Le Pen’s strong showing, including majorities in parts of Hauts de France like Picardy. The legislative elections in June will give a venue for populist and anti-EU candidates to establish a stronger parliamentary presence and potentially deprive Macron of the ability to have a PM friendly to his worldview.
Handicapping possible outcomes, we see “Frexit” as increasingly unlikely, but a real contest to govern between globalists and populists may mean little gets done legislatively to address the structural problems holding back economic improvement in France. While the status quo may not be appealing to European citizens, the European markets do seem content. We will keep one eye on June and start looking forward to Germany later this year for a referendum on many of the same issues in the true engine of European unity and prosperity.
A centrist globalist and a populist isolationist. The centrist leading the populist by what appears to be an insurmountable margin. History does not repeat itself but it does rhyme. Clinton v. Trump. Macron v. Le Pen. Macron represents the majority and mainstream views of much of France, but fails to ignite any real passion. A certain percentage of his constituency has been described as ambivalent or holding their noses to cast a vote. There are mounting concerns that voters who feel sufficiently uninspired or disenfranchised by the technocratic former investment banker may simply stay home, which is not typical for a major French election.
On the other hand, we have Le Pen, who appears to have a smaller constituency, but it is fierce and it is loyal. Her rhetoric is inflammatory and gives voice to the concerns of the French commons, turning words like globalism, partnership, integration and immigration into damning words. Macron’s margin is hovering around 20 percentage points, but there is a great deal that is still unknown, and a strong showing for Le Pen, even if it does not result in a victory, signals a major change in sentiment in the land of liberté, egalité, fraternité.
Last week, based on strengthening fundamentals and an (partially) encouraging outcome of the French elections, we re-established a beachhead position in European equities. In the jargon of our business, signs are directionally positive. Macron’s immediate strength in the polls after the first round of the French election was encouraging, pointing toward an inclination for France to remain a part of and constructively engaged in greater Europe. However, a Le Pen surprise could upset the cheese wagon, and for this reason we stopped short of building a full conviction weight.
Back to the café, perhaps for un petit verre de vin, while we wait for Sunday, May 7th.
I never knew the charm of spring
Never met it face to face
I never new my heart could sing
Never missed a warm embrace
(Yip Harburg, Lyricist, April in Paris, 1932)
April in Paris is a time of transition. The city is shrugging off the cool damp of winter. The cafes are seating more people outside than in. La Rive Gauche is coming to life at all hours. The weather can be spectacular, sunny and mid-60’s. But much like French politics, all of that can quickly unwind and send people scrambling indoors and out of the relentless rain.
We have, for some time now, maintained a skeptical view of Europe’s near-term prospects, but more bullish for the long term. A Winter and early Spring of structural, fiscal, political, and economic headwinds have kept us indoors or at least under cover. During that time, European equity markets have actually shown some strength after absorbing the blow from the UK “Brexit” vote. The FTSE All-Europe Index, measured in USD, returned 4.66% from before the last peak before the vote until the most recent close (April 18th). During that same period, the S&P 500 returned 12.78%. Advantage — US. Starting the clock instead after the market shock from the vote results (June 27th), those same indices returned 21.0% and 19.1% respectively. Europe drew down hard in the wake of the vote and rallied dramatically to outpace the US from then until now. During all of that, monetary policy from the ECB continued to be incredibly accommodative, maintaining in many cases negative rates across the zone. The earnings picture across Europe also brightened. Why are we still sipping espresso and carefully watching the green shoots of Spring climb out of the soil then?
Economic activity is gaining momentum both home and abroad. Consumer and business sentiment indicators are rising, corporate earnings growth is expanding and, while inflation is picking up, it is not yet problematic. Fiscal policy in the developed world will most likely continue to be expansionary and monetary policy, on balance, should remain accommodative. All of these developments are positive for risk assets.
With a lot of pauses and surprisingly few real corrections, the US equity market has ground steadily and dramatically higher since the trough of the financial crisis in March of 2009. In our 9th year of this climb, investors think less about that looming “what if”, but the question still remains. Andrew Jones of CityWire USA put the question to some great gatekeepers and strategists across the industry, including Gene Goldman from Cetera, Ted Dimig from JPMorgan, Ray Joseph from UBS, and Bryan Luebbert from Edward Jones, and in that august company, Wilde Capital Management. You can read the whole article here, and our perspective here.
Happy International Women’s Day. Market watchers and fundamental investors take note. The economic significance of women globally should not be underestimated. There are numerous articles today on Bloomberg and other outlets enumerating the figures which we do not need repeat here. This post is to assert our view that to allocate capital across markets without attention to the realities of gender equality and diversity is to miss a critical part of the risk and return thesis for any investment.
Today is an opportunity to get more involved in participating in and shaping that reality. In addition to being a day of recognition this is also a day of challenge to the status quo through the “International Day Without a Woman”. But, how do we create lasting change for women and fully open markets to the possibilities beyond tomorrow morning’s headlines?
For anyone in a position of privilege and power, or anyone in a position to speak to that position, be advocates for gender equality and inclusiveness through engagement. The esteemed organization Catalyst puts out an excellent resource guide that can help foster this type of engagement that we recommend reading and sharing. Aside from being the right thing to do, paying attention to these important issues is virtuous from an investor’s perspective. Board and leadership diversity, equitable pay and career advancement are hallmarks of great companies that understand how to fully and effectively utilize human capital to unlock business value. Women are also increasingly not just major contributors to but the key decisionmakers around family wealth. Starting or advancing the conversation on gender equality and diversity is good for capital formation, wealth creation and legacy building. Give people the tools and language to start effecting durable change:
What we heard last night from President Trump’s address to a joint session of Congress may point to significant opportunities for price improvement in the US equity markets. However, the policy priorities Mr. Trump outlined are fraught with internal conflicts that may be difficult to resolve in the process of translating ambition into legislation. More concerning for us, this package of priorities taken together could create the environment for a market bubble by taking from the future to fund the present.