Market Intelligence July 2017

It seems you can’t pick up a newspaper or turn on the news these days without being bombarded with the next big political or geopolitical risk (e.g. North Korea, innumerable Congressional hearings, Russian interference into US democracy, etc., etc.).  At Madison, we are often asked how politics influences our thinking.  And while difficult to quantify, below is an observation from Richard Bernstein, former Chief Investment Strategist at Merrill Lynch and current CEO and Chief Investment Officer of Richard Bernstein Advisors (RBA), which we identify with:

Fundamentals not headlines ultimately drive financial markets. Although it is always tempting to listen to the news, successful investing depends (perhaps more than ever) on a dispassionate review of fundamentals. We’ve attempted to sift through the current noise to highlight what we think is important and not, and summarized them as “The Three Ps” of politics, profits, and probabilities.

Politics: ignore it.

Politics is about what should be. Investing is about what is. At RBA, we invest based on what “is.” Our sole goal is to invest successfully for our clients, and not to advocate a particular political position. One might have liked President Obama or not, but there was a major bull market during his two terms. One may like President Trump or not, but the bull market is continuing. If one structured portfolios based on one’s views of what should be, one has missed all or part of the 8+ year bull market. Period. End of story.

We pointed out last month that the recent performance of the South Korean stock market is glaring evidence of how listening to politicians can obscure potentially exciting investment opportunities. Although politicians have focused on the geopolitical risks associated with North Korea, the stock markets have focused on the fundamentals of South Korea. The South Korean stock market is up more than 25% year-to-date (in USD terms) and roughly tripled the return of the US stock market! (see Chart) There may indeed be geopolitical risks associated with North Korea, but investors need to remember that fundamentals and not politicians’ desires to alter geopolitics ultimately drive stock markets.”

MSCI Korea Index vs. MSCI USA Index: Year to Date thru June 30, 2017

 

Important Note: This material is for informational purposes only and is not intended to serve as a substitute for personalized investment advice or as a recommendation or solicitation of any particular security, strategy or investment product. The opinions expressed herein are those of the named advisors at the time written.  Actual economic or market events may turn out differently than as presented.