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“The oldest and strongest emotion of mankind is fear, and the oldest and strongest kind of fear is fear of the unknown.” – H.P. Lovecraft PineHavenInvestmentCounsel,Inc.–Commentary–3rdQuarter2016 ByKoriAllen,CFP®andPaigeJohnsonRoth,CFA® Cabdrivershavealwaysbeenasourceofeccentricconversationandnowwiththe“gig”economy, UberandLyftdriversuptheante.Oftentimesthesedrivershaveotherjobsandsomeareretired fromothercareersandhaveevermorecolorfulpastsandperspectives. Arecentdriverwasanimprovisation(Improv)instructorandhisconversationinspiredthis commentary.Improvisationisdefinedastheprocessofdevisingasolutiontoarequirementby making‐do,despiteabsenceofresourcesorpreparation.Heinstructshisstudentsinthree cumulativeprinciples: 1. Listen 2. It’saboutyourpartner,notyou 3. Acceptandadvance Nophilosophicalcabconversationiscompletewithoutitwindingitswaytopoliticsandthisride wasnoexception.Gio,theteacher,believestheseprinciplescanbeusedinlife,soheappliedthe theorytothecurrentpresidentialcandidates.Fromhisperspective,onecandidateembodiesthese principlesandtheotheristhepolaropposite. Collectivelywe’refeelingthispolarizationinsociety,oursocialcirclesandinthemedia.Ifyou’ve beenreadingourcommentariesovertheyears,you’velearnedthatmarketsdonotlikeuncertainty. Uncertaintyandfearincreasevolatility.Thiscampaigncyclehasbeenfullofsurprises.Inthepast, wewouldhaveanticipatedsomevolatilityreflectingtheusualpartyassumptions:aDemocrat leadingmightsuggestgreaterregulationandgovernment;andaRepublicanmaysupportgreater freemarketsandlessregulation.Inthepast,marketsmayhavepunishedstocksandsectorsthat wouldbesusceptibletoagivenpartiesgeneralplatform.Inthiscyclewehave,inasense,two groundbreakingcandidates.Thefirstfemalemajorcandidateisseenasstatusquoentrenchedin Washington,DCestablishmentandpolicy.Theothercandidateisoutspoken,hasnogovernment experience,andpolicydetailshavebeenmissingorcontradictory.Bothcandidateshave historicallyhighnegativeratings.Thepolarizationandtheunusual–orusual–candidatesplay intoourcollectivefearanduncertainty. Inadditiontotheelection,westillhavetheFederalReserveinterestratewatchweighingonthe markets‐anotherdoseofuncertainty.WhilewewatchourownCentralBankwrestlewith economicstimulus,wemustconsiderourinternationalpartners.Globalizationhasmadeusever moreinterdependentuponforeigneconomiesandtheirCentralBanks.Economicstimulusand interventionhasbeenusedinunprecedentedquantitiessincethefinancialcrisisandtheeffectsof thepoliciesaswellastheresultingeconomicoutputishighlyuncertain. Asadviserswemustlookfortrendstoinformourinvestmentandplanningdecisions.Usingan improvmind,wemust“listen”.Muchofthefrustrationofthiselectioncyclecanbeseenasan expressionofdisenfranchisementinmanyareas.InanalyzingCongressionalactivity,weseethat thepercentageofrepresentativesvotingwiththemajorityoftheirpartyhasnotbeenthishigh sincethebeginningofthe1900’s.Withtherelativecloserepresentationbetweenthetwoparties, halfthepeoplewillbedisappointedornotrepresentedhalfthetime. Economically,thedisenfranchisementisevenmoreconcrete.WagegrowthasofAugustwasat 2.5%comparedtothe50yearaverageof4.2%.Theaverageearningsofahighschoolgraduateis $35,600whileabachelor’sdegreeholderwillearn$65,480.Inthistimeofuncertaintyandlow interestrates,companiesarenotretoolingorupgradingequipmenttoexpandjobsnor productivity.Instead,atlowinterestrates,theyarebuyingbacktheirowncompanystock.Someof thesebuybacksgotocompensatetheirexecutiveshelpingtofuelincomeinequalitywhilesome justsit,notproducingorgrowingprofitsbutwaitingforpoliticalrealitytosignaltheappropriate corporateplans. Theinterdependentglobaleconomyremindsusthat“it’saboutyourpartner,notyou”.About48% ofS&P500company’ssalescomefromoverseas.Oureconomichealthisdependentuponthe healthofeconomiesaroundtheworld.ThemarketsarewatchingGreatBritain’smanagementof theirexitfromtheEuropeanUnion;China’soverhauloftheireconomy;andelectionsandpolitics aroundtheglobe,notablyinFrance,GermanyandMexico.SlowgrowingUScompanies,pressureon consumersaroundtheglobeandanyincreaseinprotectionismallcouldcombinetoderailourand ourtradingpartners’tortoise‐likerecoveries. Withtheelectionamonthaway,wewillbegintoseesomeclarityinUSpoliticalleadership. FortunatelyoursystemofchecksandbalancesamongtheHouse,Senate,ExecutiveandJudicial branchesprovidesomestability.Mostpoliticalpredictionshavebeenshowinglittlechangeto partybreakdownsinCongress.Whilethisdivisionhasfueledexcessivepartisanship,amostrecent videocontroversyinvolvingthecurrentGOPnomineehastestedpartyloyaltyandperhaps, strengthenedtheindependenceofeachbranch.Whenwelookbackatthisperiod,itwillseemlike pastelectioncycles,wherelittlechanged,thankstothestrengthofourformofdemocracy. Ourworldiscomplicatedandtonavigate,wemustbeableto“accept”uncertainties,yet“advance” ourowngoalsandvalue.Adiversifiedportfolio,builtforthelong‐term,andforanindividual’s uniquesituationstillremainstheprudentapproachtoinvestingandsavingforthefuture.We’ve beenexperiencinganintenseperiodofheightened,negativenewswhichwilldissipateovertime. Morebroadly,ourpoliticians,ourcompanies,ourcommunitiesandournesteggswillbenefitaswe focusonamoreinterconnectedbigpictureandfacilitateaworldthatappreciatesthatthesumof thepartsisgreaterthanthewhole.
