Barry Schwartz February 27, 2017

The North American markets have had quite a run over the past four months, so it’s natural to wonder where we go from here.

In ordinary circumstances, many of the current issues in the markets would be cause for concern: Valuations are higher than they have been in years, markets are responding positively to Trump policies and seem to be ignoring all the negative possibilities. It is easy to imagine that we are due for a meaningful pullback, and it seems risky to commit new funds to the market.

Only hindsight can provide answers to these kinds of concerns, but that’s ok—a good investor always worries about what could go wrong.

Let’s spend a few minutes worrying about what could go right:

1. We have seen stellar results from many of our portfolio companies in their latest financial reports. CEO’s are providing confident outlooks for the rest of the year and are backing it up with dividend increases and continued share buybacks. Perhaps we should worry that markets aren’t expensive enough, and until other investments provide sensible returns for your capital, the market has nowhere to go but up. After all, with “safe” investments like bonds, you’re lucky if you get slightly over 2%; after paying fees and taxes, and accounting for inflation, you’re actually losing money. It doesn’t seem sensible to commit capital to investments that guarantee such poor returns when good quality stocks are providing rising dividends and rising earnings.

2. In the last few months, the U.S. economy has really started to pick up. We are seeing real signs of increased growth in manufacturing, industrial output and job creation. Recent surveys of consumers, small businesses and architects show people are feeling more confident about their future. Also, the recession that we saw in Alberta during 2015/2016 is over, and the price of oil and other commodities have recovered to more comfortable levels. Overall, the North American economy is finally set for solid growth, and this should lead to expanding corporate profits. Perhaps the market is being too conservative and not pricing in further upside for company earnings, which remain the primary driver of stock prices.

3. This one is the elephant in the room. Donald Trump. It seems to us that Trump has surrounded himself with a number of “adults” who actually do have a handle on the economy and business. Whether there is a massive infrastructure boom, or if corporate taxes will drop, or both, perhaps we should worry that Trump may actually become the pro-business President the market wants him to be. As a result, businesses would have the confidence to expand and hire new employees leading to the kind of economic growth that we haven’t seen in over ten years.

The next four years are going to be very interesting for investors. I remain skeptical, as any good investor should, but I am also open to the possibility that more can go right than wrong.