8 Key Takeaways from Our 40 Minutes on Markets, Wars and Outside Risks

“If you look at the world from the top down, it can present a lot of bad news, but if you look at the world from the bottom up, and the world becomes a lot more interesting”

 We appreciated the opportunity to connect with longtime investment strategist David Polak yesterday. David brings a much-needed bottom-up, company-fundamentals perspective to a noisy world of top-down thinking. Here are some of his thoughts (emphasis added):

1.     In 2024, Markets Have Largely Ignored the Headlines

One spends time reading newspapers, listening to media… you would anticipate that we were in for a dire run in markets. We have an election. We have a large deficit in the United States. We have wars in the Middle East and Eastern Europe. China is facing a significant slowdown, the world's second-largest economy, and yet, year to date The S&P is up 22% and the world's up 19%. It doesn’t feel so bad.

 2.      Profitability and expectations Underpin Prices

There is a very serious argument to be made that we are in the midst of a fourth industrial revolution. That's driving a lot of bottom up opportunity, and it means markets are supported not only by current profitability, but also potentially by future profitability.

3.     The Fourth Revolution is (Quietly) Under Way

This fourth industrial revolution led to the advent of the Internet. It's also led to genome sequencing. The first time the DNA was broken down or sequenced, it cost $2 billion. Now you can do it for less than $100. So how companies respond to that (revolution) is leading to this enormous concentration, this enormous amount of profitability.

When you look at the profits of these companies, whether it's Eli Lilly or Microsoft, whether it's Novo Nordisk, whether it's Taiwan, Semi, ASML from Holland, we and our analysts can see that this level of profitability can continue, and that is what's supporting the market.

 4.      Companies, Not Countries, Are Driving Returns

You may have noticed that I haven't said the ‘US market’ or the ‘European market’ or the ‘Asian market’, because, again, that's not how we do it. We look at it from the bottom up. Some people might say “why do you invest in all these European companies? Isn't Europe seriously challenged? And I might say, (if I wasn't polite), that you're confusing the politics with the economics. A little known fact is that if you look at the MSCI Europe… 60% of all of their revenues come from outside of Europe. When you invest in companies in Europe, you're often not investing in profitability that comes from Europe.  

Think about Hermes. Hermes is a company that manufactures fabulous handbags, and we're not investing in Hermes because the French are wild about handbags. We're investing in Hermes because the Chinese and the Japanese and yes, wealthy Americans are wild about Birkin and Kelly bags. It's a French company. But honestly, who cares?

5.     A Renaissance for Dividend-Payers?

Over the last 100 years, dividends have accounted for 36% of the total return of the S&P 500. In the last 13 years, they've accounted for 14%. All that's mattered in the last 14 years has been capital appreciation. We believe that with rates higher, we will start seeing normality resume, and dividends will become more important. So the bottom line of all of that is we see opportunity, and we see opportunity across a broad range of areas.

 6.     Investing During Periods of War

Conflict rarely impacts the stock market. They talk about Ukraine, and Israel. It tends to be good for weapon manufacturers. And I don't mean to sound heartless, but again, the stock market is a cold calculating machine, and it isn't really interested in politics. It really isn't interested in the impact of Middle Eastern wars. We've had Middle Eastern wars since 1967 hasn't stopped the stock market from going up. Where (the market) gets interested is if the oil price is affected.

What goes on in the Middle East (despite heartbreaking narratives for those involved and those of us watching), doesn't really affect the markets much, other than having a sort of a short-term impact on the oil price.

7.      three Outside Risks to Market Leaders

• If inflation were to resurrect itself in some manner, then I think that would catch people off guard. So that would be that would be problematic.

• One always has to be worried about China. If there was regime change, for instance, in China that could cause, you know, some significant dislocation (in foreign stocks).

• I worry with the semiconductors, that you could reach a moment where Microsoft and Google and Apple and Amazon say, yeah, I'm good. We've got enough of these high-scale computers. I've got, you know, a fully stocked cupboard full of Nvidia's GPUs. I've got everything I need for the next five years.

  In other words, these companies are all spending a ton of money to keep up with themselves, and sometimes all it takes is for somebody to say, ‘enough of the madness’.

 8.      The Growing Federal Deficit

It seems that we can live with it. The US is the reserve currency of the world, and this isn't like a household being in deficit, because we can print our own money. So it really depends on how much inflation you're willing to live with.

 At some point, it's going to be a problem, but nobody thinks it's going to be a problem for their investment life's lifetime or or indeed, their retirement.

 So there isn't really either a catalyst or an incentive for anybody to do anything about it. And the hope is always that you get such growth that tax receipts eventually begin to enable it to come down. That is what's happening. It’s happened in the past.