The voters in the US have spoken, and investors are weighing the outcomes and asking themselves what the future may hold.
We believe that the likelihood for continued growth in government is high -- something that we have previously stated has characterized the past three presidential terms (two under George W. Bush and one under the current president) and will most likely mark the upcoming term as well. This continued growth in government may lead to slower economic growth than might otherwise have taken place.
As professional investors, we can observe a previous four-term period of bipartisan government growth and slower economic growth -- the 1970s (technically, Lyndon Johnson was not really president during "the 1970s," as Nixon was elected in the 1968 election and took office in January of 1969, but he certainly presided over a significant expansion of government and can be grouped with the other three presidents shown above for purposes of this discussion). If you were a professional investor at the beginning of the 1970s knowing what you know today, what kinds of investments would you seek out?
We have discussed this very question in two previous posts, each published about four years ago, entitled "Return of the 1970s?" and "Return of the 1970s, part 2." Each of those posts are still worthwhile for our readers to revisit and consider. In those posts, we noted that the 1970s were marked by excessive taxation, increased government intrusion into the private sector, and misguided and excessively easy monetary policy which led to inflation and the massive destruction of purchasing power. We also observed that such an environment made it more difficult for companies to grow and to innovate, and therefore more difficult for investors to find innovative and growing companies in which to invest.
More difficult -- but not impossible. While fewer than perhaps would otherwise have been the case, there were innovative and well-run businesses that "changed the world" in their respective fields that came out of that difficult period of the 1970s. In the first of the two articles linked above, published in August of 2008, we wrote:
Furthermore, it turns out that while the 1970s were marked by economic stagnation caused mainly by excessive taxation and inflation, they were also a tremendous time for some companies. In fact, maybe the 1970s weren't that bad after all. As we have written many times before, we emphasize owning businesses, not owning markets. In any economic environment, some companies grow faster than others. During the 1970s, companies not listed on the NYSE but listed on the NASDAQ began the transition from being outcasts to being important companies. Think of owning companies such as Intel, which had its IPO in 1971*. In fact, the 1970s were a golden age for small-cap investing as described in this July Forbes article, although most investors are unaware of that fact.
During difficult economic times, smaller growing companies can get a premium, because growth is generally so hard to find. That has been true in the four years since we first published the above paragraph, just as it was during the 1970s.
As we position ourselves for the future, we will certainly look to make adjustments as necessary in light of the recent election and the prospects for increased government interference in the economy, as well as the likelihood of eventual inflation from excessively loose monetary policy. But we continue to believe that the best course for investors is to diligently seek out well-run, innovative companies in whose growth they can participate through equity ownership -- something that becomes all the more important during periods in which such growth is more difficult to find.
This is the philosophy that Mr. Thomas Rowe Price articulated in 1973 (and which was followed by his disciple, Richard C. Taylor) based on his assessment of the situation at that time. It is a philosophy that we have discussed in many previous posts in the Taylor Frigon Advisor, and it is the philosophy that we will continue to apply going forward.
We would also note that one result of the election was a continuation of the divided Congress -- in fact, the Congress became slightly more divided with this vote. To the extent that a gridlocked government can function as a check to government spending, we believe that is a potential positive sign. In fact, since the mid-term elections of 2010, government spending as a percentage of the economy has come down. Should this trend continue, as we think it could, we would view that positively.
Finally, the enormous size, strength and innovative capacity of the American economy dwarfs the impact that politics can have on the system. After all, we survived the 1970s!
Finally, the enormous size, strength and innovative capacity of the American economy dwarfs the impact that politics can have on the system. After all, we survived the 1970s!
* At the time of publication, the principals of Taylor Frigon Capital Management owned securities issued by Intel (INTC).