Skip to main content

Political Uncertainty Showing Its Face


On the night of February 28th Donald Trump issued a statement to congress and stuck mainly to the script. He showed an even temper and conveyed a positive message in the speech, as many have said, he seemed ‘Presidential’.

The optimism showed in the market and the S&P rose marginally higher than the previous close. The morning of March 4th Trump tweeted that the Trump tower had been wire tapped during the campaign; the following open on Monday the 6th saw a similar disparity in opening price from previous close, but in a negative direction. While these are not major moves and can certainly not be exclusively tied to the highlighted events, the pattern shows the internal debate of every investor; balancing the risks with the reward.

It is a simple balance of optimism versus pessimism that has caused the cycle over the last 6 months of upward market movement and then stagnation. Investors want to believe the optimistic side of the Trump agenda, the growth target of 4%, the ‘gutting’ of Dodd-Frank, the cutting back on regulations, less taxes, repatriation of offshore capital etc. Prices have been bid up with these expectations, but with every destabilizing tweet, every off the cuff concerning action, we are reminded of the risks of his agenda and his temperament.

Prices are based on expectations, and with valuations high (S&P trading at 19.2x earnings as a very basic measure) it would seem we expect a lot. The political outbursts of Trump get in the way of these expectations and could send them tumbling down. The outbursts may remind people of the reality behind the expectations, that nearly every economist says 4% GDP growth is unattainable, that it could take years of battling bureaucracy before legislation like Dodd-Frank can be overhauled, and that the isolationist tone that President Trump has struck will in fact be very bad for trade.

The risks associated with the manner in which Trump is attempting to achieve his highly optimistic goals are not fully being taken into account. When he is off the script we are reminded of the rocky political path ahead where there is sure to come more scandal, outbursts and unforeseen risks. 

Comments

Post a Comment

Popular posts from this blog

The Base Case Is Bullish For HealthSouth

HealthSouth Corporation (Ticker: HLS) operates post-acute rehabilitation centers across the country, with locations more focused in the southern U.S. Their business model is quite simple, they provide physical rehabilitation services based either in their facilities or at an individual’s home. As of December 31, 2014 they acquired Encompass, which broadens their care base to both home health and hospice. Home health provides assistance for individuals at home who require aid in their daily lives, while hospice care is for individuals with terminal diagnoses. HealthSouth’s business model is extremely dependent on their employees, and as a result they have limited economies of scale. Margins are also pretty standard, as Medicare only gives a ‘market basket’ price increase and HealthSouth itself gives their employees an equivalent increase in salary. The business model is extremely dependent on the quality of people they have interacting with and treating patients. HealthSouth unde...
9 comments
Read more

Digi International Makes A Convincing Argument For Growth

  Digi International is a small player in in the internet-of-things and connectivity space. With a market cap of just over $300 million they struggle to compete and innovate with the larger, more well funded companies such as HP. While their core business has been stagnant, they have positioned themselves to launch into an underserved and growing market through 3 small acquisitions. Over the past two years and as recently as January 2017, Digi has acquired Bluenica, Freshtemps and Smart Temps. Combined with Digi’s hardware manufacturing and cloud based platforms, their ‘Digi Cold’ suite of products allows restaurants, pharmacies, grocery stores and food services to remotely and automatically monitor the temperature of their cold storage. The current food safety procedure requires the aforementioned industries to physically check the temperature of their fridge or food, record it by hand on a piece of paper and then upload it to a spreadsheet or similar form of data stor...
2 comments
Read more

Setup For A Correction?

Today we are seeing volatility return to the market. As I write, the S&P 500 and Dow are down 2.08% and 2.39% respectively. Over the past week the VIX has risen over 40%, coming off of a period of historically low closes. While today is exciting, the real story will be told when the markets re-open on Monday. The setup today feels like a familiar story in this historic bull-run. An unforeseen political action, in this case the release of the GOP Surveillance memo, followed by a subsequent decline in the markets. Historically, shares have shown to be resilient; recovery from the surprise Brexit vote took less than 2 weeks for the S&P 500.   The term ‘buy the dip’ has come to characterize our current market. Moving towards the close today and during the open on Monday we will see if the sentiment for buying these pullbacks has shifted. Over the past week I have read second hand reports of brokers having difficulty selling volume in the market. In other wo...
1 comment
Read more