As we transition through the uncertain period of the United States Presidential Election, we note a few concerns as well as some optimism. The election itself, Federal Reserve (Fed) policy, and economic growth will key the next several quarters of stock market performance. We may also experience another exogenous factor that could challenge markets. None of that should surprise you or us. What you may find surprising is that the US stock market has been through a bear market over the course of the last 24 months and as a result we do not believe that the market necessarily needs to contract because “it has gone up forever.”

Interest Rates

Federal Reserve policy has helped drive interest rates lower since 2008. Asset prices globally have benefited from that because as interest rates decline, money costs less and consumers and investors can buy more. This in part provides the positive feedback loop of rising asset prices. Interest rates come into the picture while valuing stocks. Generally, higher interest rates should imply lower stock prices because the cost of capital is now higher. We think as a result of this mechanism, stocks could face a period of volatility if the Fed raises rates too quickly going into 2017.
However, we also have stated in the past and believe today that if the market accepted today’s low interest rates at face value, the price of stocks would be considerably higher. Therefore, given today’s general stock price levels, we believe the market has discounted a rate rise to some degree. Similarly, we believe the stock market could absorb some amount of telegraphed and steady Fed rate increases. It would not surprise us to see this course of action pursued by the Fed in 2017.

Presidential Election

The presidential election season and national discourse have provided a lot of drama and entertainment value. The market may face turbulence as a result. However, we have not positioned the portfolio with a specific outcome in mind. We believe both candidates offer something in terms of potential stock market performance. Democratic presidents are generally not bad for the stock market – please see our 2012 newsletter on our website,, under Market Commentary. At the same time the Republican candidate has some tax and regulatory ideas that may benefit corporate America. So our investment decisions continue to be based on the individual merits of our portfolio companies as well as other market factors, but with any number of unpredictable outcomes coming out of the election we have not made specific portfolio changes based on a guess of those outcomes.

GDP Growth

Our primary concern remains corporate earnings growth across the United States as well as the globe. We have limped along at 1.5% to 2.5% growth for some time and it would benefit our portfolio and citizens in general to expand GDP at a greater rate. Any sort of slump or recession could lead to considerable volatility. We are fond of saying that volatility provides opportunity, so we embrace it. However, we would welcome a higher rate of steady growth with open arms. Neither a slow and steady rate rise nor the presidential election outcome have the impact on our portfolio that a continued increase in corporate profits and GDP would have.

Despite the lackluster growth during the recovery from the Great Recession starting in 2008 to now, the stock market has performed well. We had expected a correction following the excellent returns of 2013. From December 31, 2012 to September of 2016, the S&P 500 has returned 50%. That does not capture the whole story though. Despite several calls for a bear market in the financial media, including by several notable billionaire investors, we have not heard a single word about the hidden bear!

The hidden bear market, which no one seems to have highlighted, occurred within the bull market run up of the last eight years. We look at the Value Line 1700, which includes the 1,700 largest US companies in an equal weighted index. We look at it because of the way the index is calculated, one can think of it as the performance of the “average US stock.” The S&P 500 is market capitalization weighted, which means that the bigger companies like Microsoft, WalMart, etc., have an outsized effect on the performance of the index. Although both indices can be useful tools to analyze the underlying movements of the market the Value Line 1700 seems more suited to judging the average performance of a given stock.

With that said, from the end of 2013 through the market bottom (February 11, 2016) during the correction earlier in 2016 – coming as a result of lower than expected Chinese growth, interest rate confusion and a couple of other potential issues including the US presidential primary contests – the Value Line 1700 declined 24%. The accepted definition of a bear market amounts to down 20%. So within this bull run, we have already experienced a bear market in the average stock. Maybe as interesting as that point, during the almost four year period since the end of 2012, the average stock has risen 29% compared to the S&P 500 at 50%. Therefore, certain large stocks in the S&P 500 have driven that index to a significantly greater return than the Value Line 1700.

In conclusion, we live in a period of time when a number of issues affect our country and the globe and a number may affect stock market performance. However, we find the statement that the stock market must go down because it has not gone down in eight years incorrect and fascinating that we do not see this addressed by the mainstream financial media. Regardless, we work analyzing the events of the world and addressing the company specific issues affecting the investments in your portfolio, while trying to protect and grow your assets. We thank you for that opportunity and we believe in the democratic and entrepreneurial drive that allows technology to incubate and grow within our country’s borders. That spirt drives us forward and will drive the returns of your portfolio into the future.