U.S. money managers may be the most skeptical investors in the world when it comes to the durability of the most recent move in domestic stocks. It seems that while we see a lot of our own problems clearly, foreign investors, especially Europeans, tend to view America’s political and fiscal problems as almost impossibly cliché and its promise – particularly when it comes to shale – as exciting. They also may believe the late, great Marty Zweig’s admonition to never fight the Fed. The problem now, of course, is that the stock market skeptic isn’t just fighting the Fed – he’s fighting everybody. All the world’s central bankers appear to have adopted the Bernanke Doctrine – when faced with the stark choice between inflation and deflation, always err on the side of creating too much inflation. Given the fact that financial repression has made it impossible for the saver to achieve positive real rates of return without risk, equities may continue to be driven by the T.I.N.A. factor (There Is No Alternative).

 

Many investors have developed a fair amount of policy fatigue in the last year. A continuation of the European debt crisis and America’s own political theater and dysfunction, while causing no shortage of financial indigestion, have led many professional investors to ignore the unpredictable risk introduced by global policy makers and seek themes and individual stocks that might actually provide excess returns. Meanwhile, the market is quietly making new highs, because the media tends focus on the negatives without highlighting the positives. Nonetheless, DC holds the key to what can go right or wrong. CEOs are absolutely ready to invest in America. We could see growth like never before if our elected officials can display leadership and provide us with a roadmap that doesn’t have surprises in them every six months; the U.S. could be the upside surprise.

 

Where Washington has helped, is with potential tailwind growth prospects from the healthcare and energy sectors. Hospitals are very compelling. Aside from significantly increasing the number of people in the system, the Affordable Care Act’s real impact on hospitals is that it turns near-zero paying uninsured admissions into significantly profitable admissions. Medicaid expansion will provide additional healthcare benefits, greater revenues to hospitals and managed care plans, and increased employment, which will lead to improved tax revenues. Looking longer term, healthcare costs have increased by just 3.5 percent per year the last three years, the lowest growth rate on recent record. If this trend continues, workers likely will see higher take home pay, small businesses will have more capital for investment, and the projected unfunded liabilities in the budget will come down. In addition, oil production is now at its highest level since 1992 and is providing a long term boost to growth through lower energy prices, increased job creation, and lower emissions. Of course the policy decisions that are made regarding energy and healthcare and the budget will set the trajectory for how energy and healthcare will impact growth in the future.

 

Expect March to grind positive as domestic political headlines take a back seat. Coming into 2013 Congress had major budget issues to deal with and these issues are somewhat resolved. Congress will likely pivot to social, gun-control and immigration issues in the coming weeks and the budget battles will likely be on hold until the debt ceiling needs to be lifted. We are watching the impact of sequestration, the release of the President’s budget, and the tax reform debate for clues as to where fiscal policy is headed. But the most likely outcome is that the debt ceiling in late July/early August becomes an action forcing event to resolve or partially resolve many of these outstanding budget issues.

 

 

Michael Ashley Schulman, CFA

Managing Director