In 1942 Austrian economist Joseph Schumpeter described the way free markets function as “creative destruction, where the opening up of new markets, foreign or domestic, revolutionizes the economic structure from within, incessantly destroying the old one and creating a new one.”  He described capitalism as “the perennial gale of creative destruction, how economies evolve.”

Capitalism’s gain and pain are inextricably linked.  We’ve seen this paradox of progress over the years in the agricultural revolution, the industrial revolution, and the technological revolution. Today the internet of things, artificial intelligence, robotics, and other disruptive innovations are setting the stage for what is to come.  Creative destruction is the essential fact of how economies, industries and companies evolve, transitioning from archaic out of date industries and companies, and lost jobs to a new order of better products, better jobs, higher standards of living and increased growth and profitability. The transition to new innovations and their widespread adoption can take time, but seems to be happening increasingly more rapidly today.

As we wrote in April, recent developments have turned the world upside down.  We’ve seen the beginnings of change in Brexit, the surge of populism, unexpected election results, nations divided, increasing acts of terrorism, and information overload, just to name a few. Many individuals and countries are more polarized on divisive issues and feel a heightened degree of uncertainty.  

The current economic expansion in the U.S. is one of the longest, but also the weakest in the post-world war II era. For some, it is a curious paradox that the S&P 500 Index is selling near a new all-time high, while bond markets rallied and yields remain near historic lows. The sustainability of the market advance is dependent on the continued strength of the U.S. and global economy and the rising expectations for earnings growth. Congress and the administration are making efforts to revamp the health care industry, accelerate growth through tax cuts, reduce the unnecessary regulatory burden on companies and increase spending on infrastructure, though political opposition has so far hindered the adoption of such programs.

A potential area of concern for investors is that plans to increase spending by business and consumers could be negatively impacted by the gridlock in government and anything that hinders global trade, such as a border tax. Despite all of the concerns, the latest reports show that small business optimism is at the highest level in more than 40 years and U.S. consumer confidence has risen to its highest level since 2000.

With stocks at all-time highs and low interest rates, some have abandoned their traditional asset allocations, and are adopting new programs that may not be attuned to achieve their longer term objectives. While there are many risks, the strength in the economy is, in fact, picking up, earnings are growing and industries and companies are being transformed by entrepreneurial innovation.

The S&P Index has tripled over the last eight years and is up by 10% so far this year. At these prices the market is selling in the upper range of historical forward valuations. While a market correction of 10% or so could occur at any time, neither a recession nor a bear market seems likely under current conditions.

Short term volatility in stock prices can be a concern, although it remains quite low for the market as a whole.   There are many things that could go wrong, but trying to guess the next move in the market is usually not productive. As investors we are buying into the future earning power of companies so it’s essential to take the long view and have a margin of safety to avoid paying too high a price for investments relative to their intrinsic value.

We agree with Schumpeter and can see that capitalism and the corporate entrepreneurial spirit is transforming industries and companies in America and throughout the world.  We believe that a carefully selected portfolio of equities of different businesses at home and abroad will continue to deliver profitable results over time, but they must be well positioned in this changing environment,

Successful firms continually adapt their operations to create and sustain a superior competitive position in their industry. As investors we seek to invest in companies whose managers are able to recognize and adjust their operations to capitalize on disruptive strategies. The most creative companies will find new sources of competitive advantages in their operations to replace those that are becoming obsolete.

We are grateful for those of you who have selected Whitnell to be your investing partner and hope that everyone has a great summertime.    


Note: We have gathered the information contained in this report from sources we believe reliable; however, we do not guarantee the accuracy or completeness of such information. You should not assume that any discussion or information contained in this market commentary serves as the receipt of or as a substitute for personalized investment advice from Whitnell & Co.  No part of this publication may be reproduced in any form or referred to in any other publication, without express written permission. Whitnell & Co. is an SEC Registered Investment Adviser.