The line above was spoken by the conflicted protagonist in the 1999 movie The Corruptor, directed by James Foley. At least the first phrase in that sentence is analogous to what President Trump is experiencing during his first hundred days in office. The first executive order on January 20th related to the Affordable Care Act (ACA) 1. However, the Republican’s initial failure to repeal ACA was quite similar to the shellacking that the Democrats took in the first attempt to pass ACA. The third and fourth executive orders, signed on January 25th, relate to building a wall at the southern border and dissolving sanctuaries for illegal immigrants1. From what we can tell, these are not being taken especially seriously though they do drive discussions. The fifth executive order signed January 27th related to banning travel from seven countries, and it was swiftly blocked by federal judges1. The order was then revised, and promptly blocked again. Chinatown is still Chinatown, and the president cannot change it. We expect changes from Washington DC to be small and occur in fits and starts, typical of the democratic process.
Between the election and inauguration, stocks moved higher and bonds moved lower- a return to the theoretically normal relationship between stocks and bonds. From our perspective, the rise in prices of many stocks anticipates the tailwind from significant adoption of the new administration’s agenda. The market’s perception is that some companies seemed to almost be resuscitated by the hope of the new policies. So we are saying that part of the post-election rally was a junk rally. But what if the tailwinds do not blow?
We believe the economy is on better footing with better growth potential than for any of the last ten years, regardless of presidential policies. Evidence of a solid economic footing and growth potential can be seen in bank balance sheets, unemployment, manufacturing, small business optimism, productivity, construction, inflation, durable goods, wages, and other datasets. Companies that you own, by and large, are agnostic to policy changes and have the potential to continue to grow quite nicely without policy tailwinds. Ideally, companies in your portfolio will be like Chinatown: they will change the world, the world will not change them.
“Those who have changed the universe have never done it by changing officials, but always by inspiring the people.” Napoleon Bonaparte (our emphasis)
After the recent election, there was a tremendous surge in the Small Business Optimism Index according to surveys from the National Federation of Independent Business2. Small Businesses employ much of the workforce and perform much of the economic activity in the US. The second executive order on January 24th, along with several memorandums, and other executive orders relate to expediting approvals for high priority infrastructure projects and decreasing regulation1. As a whole, these actions seem to be gaining traction. With a lower regulatory burden, small businesses seem inspired to increase investments in future growth and have more access to capital to follow the inspiration. The change is palpable in our circles of business friends and bodes well for overall economic growth. Small business is like a bee hive. When the hive changes from quiet to buzzing, spring has sprung and the intermediate future is full of new energy and new life. Though most small businesses are not public companies and we cannot invest in them, their success is critical to the success of companies you own. It is also worth noting that according to the SBA’s Office of Advocacy, there has been little change in the survival rates for new small businesses since 19953. However, the trends in the number of new businesses formed show a deflation in the level of inspiration in the US3. If reduced regulatory burden proves to be the tailwind that converts the rise in Small Business Optimism into inspired action, we will all be better for it.