Update on Quarterly Earnings Season & the Election

We’re in the heart of companies reporting their Q3 earnings and it’s been a bit of a mixed bag.  There are a handful of small pockets doing well (cloud related services, electronic payments, cybersecurity, etc.) but overall I would sum it up as stagnant.  The consumer is hurting from rising costs like healthcare while incomes are not keeping pace, and most companies just aren’t willing to invest/expand with so much political and economic uncertainty around regulation, trade, and tax policy.

One CEO described the current environment as “Meh…”  Many others have commented on the seemingly sporadic nature of business saying that orders randomly drop out one month and then return to normal levels the next.  It all makes for a tough business environment where I’m sure everyone will be happy to see this presidential election pass.

One thing that has caught my eye is the expanded level of volatility.  Many companies that are usually fairly consistent, with their stocks not being big movers following earnings releases, are seeing unusually large moves with more down than up (Amgen down 9.3%, Novo Nordisk down 13.4%, Travelers Insurance down 6%).  This tells me that the market is thin in terms of volume as I’m sure investors are stepping aside, not willing to commit money (especially to healthcare names) until the election is decided.

I used the weakness following earnings to buy some stock in Under Armour (UA) and used the strength to sell F5 Networks (FFIV).  FFIV has had a nice run since we first purchased it back in January and has surpassed the price I felt the company was worth when we bought it.  I also have longer-term concerns from competition so I’m happy to take the gain and move on.  I’ve just started using the higher bond yields to slowly begin increasing the duration of our bond holdings (i.e. buying longer maturity bonds) again and I’m also looking at adding to some healthcare names as they have been under a lot of pressure lately.

In terms of the election outcome, my job as a fiduciary of other’s money is not to root one way or the other, but to assess both outcomes objectively and position accordingly.  Most changes will be industry specific whereas the markets as a whole are still most heavily influenced by Central Bank actions – although, that could change under Trump.  If Clinton wins, some things will change but not a lot from the current state.  I think it would be positive short-term for the markets but unfavorable longer-term.  If Trump wins, we could see an initial shock to the markets since it would be considered the “surprise” outcome in terms of current expectations but ultimately I believe would be better for the investment markets in the long run (could be better or worse in other areas but I’m referring specifically to investment markets).  Both have talked about fiscal spending on infrastructure and the potential reduction of taxes on the repatriation of money held overseas.  We hold a fair number of companies with cash held outside the US so this, if it happens, could be a nice boost.

My gut tells me this election will be much closer than the polls currently indicate so I’m not assuming a Clinton victory in terms of portfolio positioning.  I’d rather not assume anything and be forced to unwind if wrong.  Hopefully everyone learned from the Brexit vote back in June that the media and polls aren’t exactly reliable prognosticators.  It’s been an interesting campaign and I’m sure election day will be just as crazy.

Thanks for following!

-Nick