Argentina checks all the boxes of a typical “banana republic”: an agriculturally-based Latin American country prone to unstable politics and economy. The country has gone through centuries of dictatorship, socialism, economic recession, hyper-inflation, debt default, currency devaluation, and price controls (in no particular order). Recent years have not been different. In December of last year, the country elected a new President that promised change and pro-growth reforms. Argentinian stock markets have responded with volatile but positive performance, having risen 13% year-to-date. At times, a stock market can be thought of as a reflection of investors’ collective expectations for the economy. In this case, Argentinian stocks are perhaps signaling cautious optimism. Since the country defaulted on its national debt payments in 2001, the country has withdrawn from the global market stage, falling in stature and importance relative to other countries. Indeed, in 2009 the country experienced the ignominy of having been demoted from the ranks of emerging market countries (by index provider MSCI) and into the lesser realm of frontier markets (a term usually reserved for the least developed countries globally). Given its fall in global economic importance, one would expect local events such as electoral politics to have greater importance and effect on the local stock market.
Some of our clients have asked us recently what effect this year’s unusual presidential election is having on the stock market given its peculiar, if not amusing developments (to some of us at least). After all, presidential elections usually don’t feature “outsider” candidates in both parties, nor is the term “contested election” normally used with such realistic probability (on both sides of the aisle). However, the United States is no banana republic. The U.S. economy, as sluggish as it may seem, is still the largest in the world and the only one that seems to offer any kind of consistent growth since the Great Recession (at albeit low levels). Yet, it has been extremely difficult to assess whether or not the economy has actually turned the corner. Economists and investment pundits regularly (still) and vigorously debate the state of the economy (and by extension the prospects for the stock market). The stock market seems equally perplexed and at times directionless, as it contemplates future action by the Federal Reserve. Will they or won’t they (raise or lower interest rates)? Do they see recession (deflation) or growth (inflation) in our future? This year, we could add the presidential election to the list of drivers for the stock market. But unlike Argentina, the United States is both globally connected and a major factor in the global economy. It is both a source and a recipient of volatility (from other countries). The country is intertwined with most other countries on the global stage and beholden to both fundamental (earnings) and non-fundamental (everything else) factors that drive global economics. This is true because many U.S. corporations derive a large degree of revenues and earnings from abroad. The United States does not operate within a vacuum and is affected by global macro drivers. As we have said in previous notes, the slowdown in China and European austerity has had major repercussions on interest rates, currency, and commodity prices. While it’s true that an election in the eighth year of presidential term offers uncertainty (see attached chart), we are not convinced of its impact given the host of other drivers of stock market volatility. We would also note that as far as presidential elections go, most volatility is exhibited during elections that follow economic recession where the electorate is already uneasy regarding their own finances. That is not the case this year. We would say the U.S. election has had a comparatively minor effect on stock market volatility. To the extent that there is increased volatility and negative performance in stocks, it may just be reflective of seven straight years of stock market advances and some wind coming out of the sail of enthusiasm.
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Regardless of stock market volatility and what actually drives it, we welcome it whole heartedly. To the extent that there is volatility stemming from non-fundamental (or “macro”) events, we would welcome it as that means dislocations and mispricing in the market. We are high quality, long-term, bottoms-up value investors that focus on company specific fundamentals to determine their investment worthiness. If macro issues cause the stocks of the companies we invest in or would like to invest in to fall, we will look at the event as an opportunity to own (more) shares at better prices. We seek to take advantage of short-term volatility to generate long-term value. A few months ago, we wrote a note discussing our belief in the country and what it continues to offer above and beyond what others do. We think that regardless of your political leanings, or whether or not you agree or disagree with any particular politician, president, or candidate, there are strong reasons to believe in this country, what it offers, and that it will continue to do so in the future – despite any disenchantment you may currently have in its leadership. In the note, we discussed our support for Warren Buffet’s comments regarding the future welfare of our children. To paraphrase, he said that babies born today are the luckiest ever. What he meant, and what we also believe is that despite the country’s faults (and there are many), the United States is still the best country in the world to live and raise a family. We mentioned that one only has to look at the lengthening lifespans of our population to understand that our quality of life is superior to that of the rest of the world. This nation was created by very smart people who constructed numerous safeguards or checks and balances into our political system to ensure that the country could not be moved too quickly or too strongly in any one direction, and without general consensus and enough time to thoughtfully think through potential changes. We still believe this is true. We also believe that one should not change their long-term goals due to any temporary shift in short-term politics or mood. After all, volatility in the short-term allows for gains in the long-term if you are opportunistic. Again, we would consider any volatility driven by non-fundamental sources to be opportunities. We hope that you do too and would once again like to thank you for your continued trust in us and our ability to help you reach your long-term investment goals. Please contact us with any questions or concerns you may have.
The foregoing content reflects the opinions of Horan Capital Management and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct.
Past performance is not a guarantee of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns.