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“The most important thing in life is to stop saying 'I wish' and start saying 'I will.' Consider nothing impossible, then treat possibilities as probabilities.”
— Charles Dickens, David Copperfield


October 1, 2018

Integrity, what is it?  Merriam-Webster defines integrity as: (1) a firm adherence to a code of especially moral or artistic values, (2) an unimpaired condition and (3) the quality or state of being complete or undivided.  In other words, honesty, morality, decency, fairness, truthfulness and unity.  Almighty God, we need integrity!

Last week the Senate Judiciary Committee heard testimony for a matter you are already well aware.  It is not my place, nor is this the proper forum, to render opinion on who I “believe” is honest, but this process may well define our system of law for years to come.  And while especially important for our legal system, this also speaks to what standard companies and their management teams may ultimately be held.  For now, without clarity to any lasting effects, the economic engine of American democracy is thriving.  Witness for the first time since the Labor Department began keeping record, there are more job postings than job seekers, granting folks desiring a better future opportunity to achieve one.   

Another confirmation to the robust economy is gross domestic product, or GDP.  Generally defined as the value of all economic activity in a country, U.S. GDP has increased an average 2.3 percent and 2.8 percent per year for the past twenty years and fifty years, respectively.  During this year’s second quarter, GDP rose 4.2 percent.  Much is said about the $20 trillion debt, and rightfully so, but we also have a $20 trillion economy for the first time.  To put the elevated GDP percentage another way, the 1.9 percent difference between 2.3 percent growth and 4.2 percent growth on a $20.4 trillion economy is an added $387 billion in economic activity.  Just the additional 1.9 percent growth would rank as the world’s 32nd largest economy.  

With tax cuts, decreased regulation, still accommodative interest rates and growing employment, corporate earnings have materially risen since Q4, 2016.  This is in contrast to the seven straight earnings growth declines that led to and included September 2016.  While this seven quarter decline averaged -9.1 percent, the seven straight quarterly increases since then has produced average earnings growth per quarter of +15.1 percent.  Ultimately following earnings, the stock market has predictably increased. 

An exercise we frequently engage in involves paying attention to limited stories found on the latter pages of The Wall Street Journal.  For a forward looking stock market, page one news is fully reflected in stock prices, but not necessarily what is reported thereafter.  This is important because, for the first time, we are beginning to see headlines that suggest softness in large purchases, such as automobiles.  In addition, tariffs are a core concern of ours because they hinder the effective allocation of capital and ultimately hit consumers with what is in essence a tax.  Another “tax” comes from rising oil prices, which increases the costs of gasoline to heating oil.

We are not yet sounding an alarm, but we are vigilant.   Too, we continue to see stocks as a better investment than bonds.  Having experienced eight rate increases since Q4 2015, the bond market has been fairly resilient.  Yes, bond indices are generally negative on the year, but modestly so.  Because major overseas markets have yet to raise rates, foreign liquidity continues to buy U.S. debt, keeping U.S. rates lower than they otherwise would be.  This will not last.    

Given it was thirty-plus years ago (our memory too could be in question), we recall President Reagan often referred to as the Teflon President.  Our markets could easily receive a similar title.   Thanks to 24-hour cable news and social media, societies here and around the world have gone to great lengths to shape what we hear, tell us what to believe and condemn us if not their position.  Usually, the stock market would crumble under such emotion and uncertainty, but not this market.  Through all the noise, the bastion of American capitalism is concerning itself with what it should be.

As we have stated many times, stock prices follow earnings, and earnings growth has simply been extraordinary.  While the velocity of growth will begin to slow this quarter, growth persists.  If tariff negotiations can begin to conclude and the midterm elections do not materially change the political landscape, our equity markets should behave for the remainder of this year and into next.

As always, we are grateful for your trust and support.

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