Hopefully you weren't holding your breath. The government reopened on November 13th after a 43-day shutdown, the longest in US history. Our country's fiscal year runs from October 1st - September 30th. The annual budget has been on this calendar since the Congressional Budget and Impoundment Control Act of 1974, which extended the deadline for a spending budget from July 1st to allow for a more organized budget process. Ha!
While governmental agencies halt their official economic data releases during a shutdown, corporations do not have that luxury. Third quarter earnings season marched on and is nearing completion. At present, more than 80% of S&P 500 companies have beaten estimates, with financial companies and information technology leading the way. From our view, the tape feels bifurcated. While the largest ten companies in the S&P now account for ~40% of the overall value, the market is littered with companies trading at what appear to be low valuations. Areas like energy, consumer cyclicals and staples, healthcare, industrials, and small capitalization stocks offer opportunities that appear compelling on a relative basis.
One of the many difficulties of investing through a technological boom is that it is impossible to know where you are in the cycle. Precisely because it is new, nobody knows how and when things are going to play out. To borrow a baseball analogy, we don’t know whether we are in the first inning, the third inning or the ninth. The best we can hope to do is participate, harvest some gains along the way and not allow ourselves to get overly concentrated. It also means that as we add to opportunities outside of technology, we will most likely be buying companies that lag the hotter parts of the market until something changes.
Our biggest concern about AI is that the trillions of dollars being spent on infrastructure have the possibility to reduce and, in some cases, eliminate the need for human labor. Recent employment data from Challenger, Gray & Christmas is starting to show a negative impact on employment from AI. So far, the impact has been relatively small, but it isn’t hard to see why a majority of Americans say they are more concerned than excited about AI. History shows that new technologies tend to usher in employment opportunities that previously did not exist. But change can be unsettling. And the promise of new jobs and industries in the future may be of little solace to the checkout clerks and truck drivers of today, much like the elevator operators, farriers and lamplighters of yesterday.
While the future remains as uncertain as ever, there are both fiscal and monetary stimuli that are likely to provide tailwinds over the next year. The OBBB (One Big Beautiful Bill) permanently lowers tax rates established in the 2017 Tax Cut and Jobs Act. This will provide a large tax refund to consumers, who are likely to spend the bulk of what they receive. The bill also makes the Qualified Business Income deduction permanent and grants immediate expensing of factories and production equipment. On the monetary side, the Fed recently announced that it will stop shrinking its balance sheet on December 1st. This additional liquidity, combined with additional easing of the Fed Funds rate will provide an increase in liquidity and lower borrowing costs. As the landscape changes, we will be on the lookout for potential risks, as well as new opportunities. We wish everyone a happy and healthy holiday season.
The Hanson Slater Power Group
Baird
925 4th Avenue, Suite 3600
Seattle WA 98104
206 664-8888
Visit our website: www.hansonslaterpower.com
Past performance is not indicative of future results and diversification does not ensure a profit or protect against loss. All investments carry some level of risk, including loss of principal. An investment cannot be made directly in an index. Robert W. Baird & Co. Incorporated