Trump Win Can’t Trump Fundamentals

November 11, 2016

By Craig Maddock CFP, FCSI, CIM, FICB, CFA, MBA
Vice President, Investment Management

Now that we’ve had a few days to digest the U.S. election results, let’s ask ourselves: will our investment opportunities change with a Trump win? The short answer of course, is yes – but it really is a question of how much.

It’s still too early to tell exactly what a President Trump will mean for the global economy, financial markets and investments over the long term. But the stock market’s quick recovery this week after the election simply illustrates what markets are meant to do: look beyond today’s events into the future.

It also shows that events like these, although surprising in the moment, will likely have less of an effect over the long term than what media headlines might indicate. Warren Buffet often has good wisdom in times of perceived crisis:

“Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.”[1] 

A Company’s Intrinsic Value Doesn’t Change

In times of market uncertainty, it’s important for investors to step back and remember what investing is all about. While a company’s stock price can fluctuate based on speculation, the intrinsic value of a company – in other words, what a company is worth – typically changes slowly over time and is far less volatile than its stock price suggests. 

I spoke with several of our fund managers following the election, and what’s clear is our shared view that a continued focus on fundamentals will drive investment opportunities. 

The shortest answer I received was, “We won't be making any material changes to intrinsic values as a result of the election,” which means that any downward stock price pressure from market volatility will be a welcome buying opportunity.

Barrow Hanley, our U.S. Dividend Value asset manager, reaffirmed that  “as a bottom-up stock picker, any changes in our stocks’ intrinsic value/target price would be a function of changes in discount rate, earnings outlook, dividend outlook, and what the market is willing to pay for the earnings stream. At this point it’s too early to tell what impact potential policy changes might have on these factors. “, That said, it is clear that they are ready and willing to adjust their value as the policy unfolds.  

Fiduciary Management Inc., our U.S. Value asset manager, emphasized that most of the companies they own provide needs more than wants, and are largely nondiscretionary in nature. For example, if you are going to explore and produce energy, you need Schlumberger.  If you live in a rural town or a downscale part of a city and you need basic living necessities, you need Dollar General.  If you are automating production and making manufacturing more efficient, you need Honeywell and Rockwell.  These things have not changed as a result of the election. 

I’ll leave you with another quote from Peter L. Bernstein, author of Against the Gods, who said: “In making decisions under conditions of uncertainty, the consequences must dominate the probabilities. We never know the future.”

Although a Trump presidency comes with uncertainties, at the end of the day our focus on company fundamentals will not change.

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