The gap between perception and reality is a key concept for us, as contrarian investors.
Year-end is a logical time to stand back and assess the year just ending, our current situation, and prospects for the next year. Many others ably describe the facts and statistics and the major themes. We will look at a pair of critically important things that may have fallen into the gap.
We believe the president has a flawed understanding of global trade. He recently spoke again of disastrous trade deals, massive profits to other nations, and millions of American jobs lost. The reality is, trade lets us get more for everything we produce, and pay less for everything we consume. It enriches America and the world.
We aren’t here to argue politics. But we are here to understand economics and markets as best we can, for your benefit and ours. The markets may be underestimating the potential for damage to the economy, corporate profits, employment, and stock prices if the president’s rhetoric ever translates into actual policy.
The second concern is about Congress, and a problem to which both parties have contributed (in my opinion.) The American system of governance historically produced major legislation through a bipartisan process. The Civil Rights Act, Social Security, Medicare, and the Tax Reform Act of 1986 were all products of give and take between members of both parties. All of these endured.
Without debating the merits of either, the Affordable Care Act and the recent tax legislation are the products of a partisan process. Both featured closed-door negotiations by small groups, deal-making that benefitted narrow groups to win votes, and straight party-line votes that produced less-than-perfect outcomes.
The ACA has been under attack since it was passed, and is now being unraveled by the opposition. The same thing could happen in the years ahead to the tax legislation. Uncertainty about tax policy may create problems for companies and the economy.
The short version of all this is that we are optimistic—as always. But our eyes are wide open. We will continue to diversify into sectors that may be less affected (or unaffected) by these issues. This is consistent with our core principles of seeking the best bargains and avoiding stampedes.
Clients, if you would like to discuss these issues further, or have anything else on your agenda, please write or call. In the meantime, we are enjoying the results of 2017 and hopeful about what will happen in 2018.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.